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The markets are clearly reacting strongly to the disappointing ISM Manufacturing PMI data, which underscores the ongoing challenges in the U.S. manufacturing sector. The contraction for the fifth consecutive month highlights the persistent impact of elevated interest rates, raising concerns about the broader economic outlook. The sharp sell-off in major indices, particularly in the tech and energy sectors, reflects growing investor anxiety about the potential for a deeper economic slowdown.

The fact that mega-cap stocks like Microsoft (MSFT), Apple (AAPL), Nvidia (NVDA), and Alphabet (GOOGL) are all in the red suggests that investors are pulling back from riskier assets amid uncertainty. Nvidia’s significant drop of 7.5% is particularly noteworthy, indicating heightened sensitivity to any signs of weakening demand or economic headwinds. The gain in Tesla’s (TSLA) shares stands out as an outlier, possibly driven by company-specific news or investor rotation within the tech sector.

As traders now turn their attention to the upcoming JOLTS report and the jobs data later this week, the focus will be on how the labor market is holding up in this environment. These reports will be crucial in shaping expectations for the Fed’s next move, with the market already pricing in a rate cut on September 18th. The debate seems to be around whether it will be a 25bps or a 50bps cut, with the ISM data adding weight to the argument for a more aggressive cut.

The modest rise in the dollar index and the decline in the 10-year Treasury yield also reflect the market’s shifting expectations around Fed policy. The dovish tilt from the Federal Reserve signaled during the Jackson Hole Economic Symposium, seems to be gaining traction, especially as more economic data aligns with the need for easing.

Overall, the market is clearly on edge, with investors balancing the potential for rate cuts against the broader implications of a slowing economy. The upcoming labor market data will likely be a key determinant of market direction in the near term.

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