MarketView for July 6

Summary 

It was a tough way to end a holiday shortened week and the first week of the third quarter, as stock prices fell sharply on Thursday, sending the S&P 500 to its third-straight weekly loss as a result of a worse than expected decline in June non-farm payrolls. The report, which indicated that employers shed nearly half a million jobs last month, sending the unemployment rate to 9.5 percent, the highest level in nearly 26 years, reawakened fears that the recession might not be abating after all. The result was a pummeling for share prices with energy, industrials, financials, technology and consumer-oriented sectors feeling the most pain.

For the week, the Dow Jones industrial average fell 1.9 percent, while the S&P 500 dropped 2.5 percent and the Nasdaq lost 2.3 percent. Yet despite being down for a third straight week, the S&P 500 index is still up 32.5 percent from the 12-year closing low of March 9. Light volume due to Wall Street's thinly staffed trading desks accentuated Thursday's sell-off.

Additionally, the New York Stock Exchange was hit by connectivity glitches that affected orders originating from the trading floor. The NYSE extended its regular close from 4 p.m. to 4:15 p.m. to execute customer orders affected by system irregularities. The financial markets will be closed on Friday for the Independence Day holiday, with July 4th falling on Saturday this year.

On the technology front, shares of IBM were down 3 percent to $101.73, making the stock the Dow's top decliner. Apple, another tech bellwether, saw its share price 2 percent to close at $140.02. It was the worst performer on the Nasdaq.

In the energy sector, Exxon Mobil fell nearly 3 percent to $68.49as sweet domestic crude settled down $2.58, or 3.7 percent, per barrel at $66.73.

NRG Energy saw its share price fall 4.8 percent to $24.80 after Exelon raised its hostile takeover bid for the independent power producer by more than 12 percent to $7.45 billion, ahead of NRG's annual meeting.

Johnson & Johnson announced on Thursday that it had agreed to pay $1 billion for an 18.4 percent stake in Elan Corp plc and will buy most rights to the Irish company's portfolio of experimental drugs to treat Alzheimer's disease. Elan's U.S.-traded shares rose 8.6 percent to close at $7.60, while J&J, a Dow component, saw its share price fall 1.9 percent to $55.98.

Among consumer-oriented stocks, Macy's was down 6.3 percent to $11.

Data indicating that factory orders came in better-than-expected for May was overshadowed by the bleak news on the labor market.

Natural Gas Rigs Rise in Number

The number of rigs drilling for natural gas in the United States took an unexpected turn upwards once again, the second gain in seven months, according to a report on Thursday by oil services firm Baker Hughes in Houston. The report indicated that the number of natural gas drilling rigs hit 688 this week, still 851 rigs, or 55 percent, below the same week last year, when there were 1,539 gas rigs operating.

U.S. natural gas drilling rigs have been in a mostly steady decline since peaking above 1,600 in September, but two weeks ago the count rose for the first time since November 2008. The gas rig count decline appeared to be slowing to just below the 700 mark, despite still-weak natural gas prices, possibly because some prolific shale plays, like Haynesville in Louisiana or Marcellus in Appalachia, may still be economic.

Tighter access to credit and a 70 percent slide in natural gas prices to about $3.50 per mm Btu, after peaking above $13 last July, have forced many producers to scale back drilling operations.  However, with the natural gas drilling rig count below 700, most analysts expect to see year-on-year output declines soon, which should help tighten the overall supply-demand balance.

Job Losses Rise

Employers cut far more jobs than expected last month and the unemployment rate hit 9.5 percent, the highest in nearly 26 years, underscoring the likelihood of a long, slow recovery from recession. The loss of 467,000 jobs reported by the Labor Department on Thursday was 100,000 more than Wall Street economists had expected, with virtually no major economic sector spared.

Since the economy fell into recession in December 2007, 6.5 million nonfarm jobs have been lost and the unemployment rate has nearly doubled.

The rise in the jobless rate from May's 9.4 percent took it to its highest level since August 1983. In a further indication of weakness, the report showed the length of the average workweek shrank and wages were flat last month.

Businesses have slashed payrolls sharply in an effort to protect their bottom line in the face of a plunge in consumer demand. President Barack Obama said the June jobs report was "less devastating" than monthly losses in the first quarter, but added that was little comfort to millions of Americans suffering from unemployment.

"It took years for us to get into this mess and it will take more than a few months to turn it around," Obama said at the White House.

Monthly job losses peaked in January at 741,000 and had decreased each month since then until June, an indication that the pace of the economy's deterioration had been slowing.

The Labor Department revised figures for April and May to show a net 8,000 fewer jobs were lost in those months than previously reported. Job losses for the month of May were revised downward to 322,000, while April’s losses were revised upward to 519,000.

The good news is that the Labor Department also reported that first-time claims for state unemployment insurance benefits fell last week. In addition, the number of people still on jobless aid rolls after claiming an initial week of benefits fell to just over 6.7 million in the week ended June 20.

While June's job losses were widespread, the steepest decline was in services, where payrolls dropped by 244,000 jobs after a 107,000 decline in May. Construction lost 79,000 positions and government employment fell by 52,000.

Manufacturing was one of the few areas to show a smaller drop in June, down 136,000 after a 156,000 fall in May. Nonetheless,  it was the ninth straight month that more than 100,000 jobs were lost in that sector.

The median time all individuals were out of work increased to 17.9 weeks in June, the longest on records dating to 1967. The weak labor market also continued to undercut real wages. Average hourly earnings in June were flat with May at $18.53 an hour, while the length of the average workweek fell to 33.0 hours from 33.1 in May, pressuring consumer incomes.

Over the past year, average weekly hours have risen just 2.7 percent, the smallest 12-month change since the period ended September 2005.