The credit markets have been showing tentative signs of recovery, though they remain strained, and demand for safe assets remains high. The three-month Treasury bill on Wednesday was yielding 0.33%, up from 0.22% on Tuesday. Overall yields remain low, showing that demand is so high that investors are willing to earn meager returns as long as their principal is preserved.
The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.98% from 4.03% late Tuesday.
Doubts about the economy were already surfacing in Tuesday's session, when investors halted an early rally and began collecting profits from stocks' big Monday advance. Wednesday's data confirmed the market's fears that the economy is likely to remain weak for some time, and that corporate profits are likely to suffer.
Mark Coffelt, portfolio manager at Empiric Funds, said moves by European and U.S. government officials to begin investing directly in banks are easing worries about credit. But the steep pullback in stocks that began last month after the credit markets lurched to a near standstill has now created worries that consumers will spend less after seeing the value of their retirement accounts and other investments drop.
"Markets abhor uncertainty and so we got a lot of that resolved this weekend and we got the reward Monday but now people are saying 'OK, now what is the economy going to do?"'
"We're definitely going to get a slowdown from the terror of going through that," Coffelt said.
Investors were also digesting the first wave of third-quarter earnings reports, including those of two banks caught up in the mortgage mess. JPMorgan Chase reported an 84% decline in its third-quarter profit, offering further evidence of how the financial crisis is slamming the economy.
JPMorgan, which bought the assets of Washington Mutual late last month as a result of the mortgage bust, said the profit drop reflected losses on bad mortgage investments, leveraged loans and home loans. The quarter's performance beat expectations, however.
Wells Fargo, meanwhile, reported that its third-quarter profit fell 23% after it took hits on investments in troubled finance companies and increased its credit reserves. Still, results topped expectations. Wells Fargo is in the process of acquiring stricken Wachovia Corp; Wells Fargo and JPMorgan, despite their own troubles, are among the nation's strongest banks.
In other economic data Wednesday, the Labor Department said the producer price index, which measures inflation pressures before they reach the consumer, fell 0.4% in September, driven by lower energy costs. That decline matched analysts' expectations.
Light, sweet crude fell $4.09 to settle at $74.54 per barrel on the New York Mercantile Exchange.
In Asian trading, Hong Kong's Hang Seng Index lost nearly 5% after rising more than 13% the previous two days. Markets in Australia, South Korea, China, India and Singapore also sank. Japan's Nikkei 225 index, however, ended up 1.1% after soaring 14% in the previous session.
In Europe, Britain's FTSE 100 fell 7.08%, Germany's DAX index fell 6.49%, and France's CAC-40 fell 6.82%.
Contributing: Matt Krantz