Shares fell heavily on Wall Street on Wednesday after a gloomy report from US factories and signs of a slowdown in employment growth prompted fears that the recovery in the world's biggest economy is fading.
With weaker than expected data from Europe and China adding to the downbeat mood, the Dow Jones industrial average lost 280 points – 2.2% - in New York. It was the biggest points drop in almost a year.
Selling was initially triggered by the monthly health check on private sector job creation which showed a rise of only 38,000 last month, well down on the 177,000 jump recorded in April. Economists immediately scaled back their forecasts of a hefty increase in employment in Friday's non-farm payrolls report to between 100,000 and 120,000. The decline in the Dow intensified with the release of the index on manufacturing from the Institute for Supply Management, which recorded a drop from 60.4 in April to 53.5, its lowest level since September 2009 and far lower than Wall Street had anticipated.
The dollar fell against the euro and the Swiss franc on anticipation that the Federal Reserve, the US central bank, would hold interest rates close to zero until the second half of 2012. The later recovered ground lost against the euro only because Moody's again downgrade de debt-laden Greece's credit rating.
The yield on the benchmark 10-year treasury bill dipped below 3% for the first time since late 2010 as analysts pushed back their forecasts of when monetary policy would be tightened. Some predicted a third bout of quantitative easing – money creation – from the Fed.
Despite the additional $600bn pumped into the economy over the past eight months, it grew at an annualised rate of only 1.8% in the first three months of this year, a sharp slowdown from its performance last year.
Mike Riddell, fund manager at M&G, said: "The last month has been a horror show for the world's biggest economy, and things are getting even worse if data released today is anything to go by. It seems that almost every bit of data about the health of the US economy has disappointed expectations recently.
"US house prices have fallen by more than 5% year on year, pending home sales have collapsed and existing home sales disappointed, the trend of improving jobless claims has arrested, Q1 GDP wasn't revised upwards by the 0.4% forecast, durable goods orders shrank, manufacturing surveys from Philadelphia Fed, Richmond Fed and Chicago Fed were all very disappointing. And that's just in the last week and a bit."
Separate US data showed a 4% drop in mortgage applications in the latest week and a pick-up in the number of people laid off during May.
Tom Levinson, an analyst at ING, said: "The US soft patch for data is clearly continuing and the market will be comfortable with its pricing for the first Fed rate hike to come only in the third quarter of 2012."
Reports on manufacturing from other parts of the world also pointed to a slowdown. China's purchasing managers' index fell from 52.9 to 52.0, close to the 50 figure that separates expansion from contraction, while the reading for the eurozone dropped to a seven-month low of 54.6. Spain and Greece slipped back below 50, suggesting that their manufacturing sectors were back in recession. The depressed state of the Irish economy was underlined by official figures showing that unemployment rose to 14.8% of the workforce last month.
The prospect of weaker global growth dragged down oil prices by around 2%.