The most recent manufacturing report from the Institute for Supply Management marked the fifth consecutive month of decline, raising fears that the Federal Reserve's aggressive interest rate hikes may have overly strained the U.S. economy.

Traders were already on edge ahead of a busy month of economic updates, including Friday’s critical jobs report, next week’s inflation data, and the highly anticipated mid-month Fed rate cut.
 

The Dow plunged over 600 points

The Dow Jones Industrial Average plunged over 600 points, or 1.5%, dropping to 40,945 during the final hour of trading on Tuesday.

As of 3:00 p.m. Eastern time, the S&P 500 had fallen 2% to 5,536, while the Nasdaq Composite was down 3.1% to 17,169, according to FactSet data.

Both the S&P 500 and Nasdaq were on track for their worst first day of the month since May 2020, with the Dow heading toward its worst September opener since 2015, per Dow Jones Market Data.
 

The market took a leg down

Chip stocks dragged the market down, with Nvidia plunging over 9%. Other semiconductor companies like Micron, KLA, and Advanced Micro Devices also experienced losses during the session.

Overall, the VanEck Semiconductor ETF (SMH) dropped more than 7%. The information technology sector of the S&P 500 led the broader index lower, marking its worst day since September 2022.

The market began to tumble Tuesday morning after two reports on manufacturing output indicated signs of weakness. S&P Global’s report showed a decline from July to August, while the Institute for Supply Management's data came in below economists' expectations, according to a Dow Jones poll.

This renewed worries about slowing U.S. economic growth, contributing to a widely followed sell-off that had already rattled markets early last month.
 

The upcoming economic data

Friday’s jobs report is arguably the most important piece of economic data that central bank officials will have to parse before their monetary policy meeting on September 17-18. A weak headline number coupled with a higher unemployment rate could push the Fed to roll out a jumbo, half-point rate cut to put the economy back on track.

A softer number would mean a quarter-point hike. Either way, consumers and businesses are looking forward to any breathing room that lower interest rates will bring, in the form of less punishing loan rates, mortgage rates and other ways to borrow money.
 

“The market, in terms of price momentum, in terms of valuations, of sentiment, has pretty much recovered, and we are going into the seasonally weak September, October period here. So I would expect choppy markets driven by various factors, geopolitics, corporate earnings, bellwethers like from the AI sector,” Wittmann said.

The widely predicted rate cut of at least 0.25% is expected to stimulate a sluggish housing market by reducing mortgage rates, and also to free up more disposable income for consumers with adjustable-rate loans, as their minimum payments will decrease.

For consumers in a position to pay cash and have money in the bank, the interest rate reduction won’t really matter, except when it comes to the interest they receive from savings accounts and fixed income investments they may own.