ASX 200 set for first 2% drop since March 2023. Here's what you need to know

The S&P/ASX 200 fell as much as 2.2% in early trade on Friday – if the market doesn't muster up a small bounce, this will mark our first 2% drop since March 2023.

The market flipped back to risk-off in the wake of Thursday's rally that saw the ASX 200 push 0.2% higher to close above 8,100 for the first time on record.

Today's selloff was largely driven by disappointing economic data and mixed earnings from bellwether US companies including Meta, Intel and Amazon. Below, we'll examine the key factors driving today's selloff.

US economic data raises growth fears

The ISM manufacturing PMI dropped to 46.8 in July, down from 48.5 in the previous month and below analyst expectations of 48.9. A PMI reading below 50 indicates contraction in the manufacturing sector.

The report contained a number of downbeat data points and comments from manufacturing companies that participate in the survey, some highlights include:

• Employment sub-index came was 43.4, down from 49.3 last month and the lowest since June 2020

• New orders sub-index remained in contraction territory, registering 47.4 form 49.3 in the prior month

• Prices index ticked higher, up to 52.9 from 52.1 in June

• "Demand continued to soften into the second half of the year. Supply chain pipeline and inventories remain full, reducing the need for overtime." [Transportation Equipment Manufacturer]

• "Consumer behaviour is changing more than normal. Sales are lighter, and customer orders are coming in under forecasts." [Food Beverage & Tobacco Products]

• "Availability of parts is good ... Ordering is still well below typical levels." [Computer & Electronic Products]

The number of Americans filing new applications for unemployment benefits also spiked to an 11-month high. Initial jobless claims hit 249,000, up from 235,000 a week ago and above analyst expectations of 235,000. This raises concerns that the labour market might be unraveling amid corporate cost cutting and seasonal fluctuations.

Why does this matter?

The market began to more aggressively price in rate cut expectations after the weaker-than-expected labour market and manufacturing data. Some of the key overnight movements include:

• US 2-year Treasury yield is now trading at 4.13%, a level not seen since May-23

• US 10-year Treasury yield has dipped below 4.0% level for the first time since Feb-24

• CME's FedWatch tool is now showing that there's a 20% chance of a 50 bp cut in September, up from 11% earlier this week

Some economists have flagged that the risk of higher unemployment now significantly outweighs the risk of higher inflation.

For a long time, the market perceived good news as bad news because stronger-than-expected economic data would push back rate cut expectations. This dynamic flipped to bad-news-is-bad-news as growth concerns increasingly outweigh rate cut tailwinds.

Mixed big tech earnings

While Australian investors may not typically focus on US tech giants, last night saw significant announcements from several high-profile companies:

• Intel shares are down almost 20% in after hours. The company announced it would lay off more than 15% of its workforce or roughly 15,000 employees following a disappointing Q2 earnings report.

• Meta shares rose 4.8% after Q2 earnings beat analyst expectations by 9%. The company also provided an optimistic Q3 outlook, citing robust advertising demand. However, this was tempered by projections of increased capital expenditure for the remainder of this year and 2025.

• Amazon shares are down 6.8% after hours. While Q2 results largely met expectations, Q3 net sales guidance of US$154-158.5 billion fell slightly short of the US$158.2 billion consensus.

Other pain points

Energy, Financials and Discretionary are the worst performing ASX sectors on Friday. This reflects some of the above headwinds about how growth concerns are starting to outweigh the benefits of rate cuts.

Copper prices sold off 2.3% overnight and that's dragged a heavyweight name like Sandfire down around 4% on Friday.

Lithium stocks remain under pressure after Albemarle announced plans to downsize its WA plant. The market is not improving. It’s actually probably getting a little worse. We’re using the term ‘lower for longer’ from a pricing perspective," the company said in a statement.

Uranium stocks are down 8-15% after top global producer Kazatomprom hiked its full-year production guidance to 22.5-23.5 million tonnes, up from its previous guidance of 21-22.5m tonnes.