MarketView for June 4

Summary  

Wall Street ended a shortened week on a distinctly negative note as the major equity indexes closed at their lowest point since after May's jobs figure disappointed many on the Street. Add in the concerns over the developing debt crisis in Hungary and it was anything but a good day that closed out a miserable week. The S&P 500 fell below 1,070, which had been considered a support level for the market. The index closed just below the intraday low the market reached during the so-called "flash crash" on May 6.

According to a report by the Labor Department, the economy added fewer-than-expected jobs last month, with a large portion of those being temporary positions for the U.S. Census. The Labor Department reported that the economy added 431,000 jobs in May, a number that was far short of the 513,000 that Wall Street had expected. The unemployment rate dropped to 9.7 percent in May from 9.9 percent in April.

Even so, analysts said it didn't alter their view that the economy is stabilizing, although gradually, with many expecting unemployment will remain high for some time. Nonetheless, investors and traders rapidly unwound positions created under the auspices of expectations for a higher number.

Wall Street, which is down 12.5 percent since the April 23 closing high for this year, sold off broadly, led by economically sensitive sectors, including industrials, technology and small-caps, on concerns that the economy will recover in an uneven pattern.

Worries that Europe's sovereign debt troubles could spread flared again after a Hungarian official said the country was at risk of a Greek-style crisis, driving the euro to a more than four-year low against the dollar.

The CBOE Volatility Index or VIX .VIX, Wall Street's favorite barometer of investor fear, closed up 20.43 percent to 35.48. Large manufacturers were among the Dow's worst losers, with Caterpillar ending the day down 5.5 percent to close at $57.76. United Technologies fell 4 percent to $65.13.

The financial sector also ranked among the day’s worst performers, with JPMorgan Chase down 3.5 percent at $37.75, and Bank of America down 2.9 percent at $15.35. For the week, the Dow was down 2 percent, the S&P 500 showed a loss of 2.3 percent, and the Nasdaq was down 1.7 percent.

There were concerns from Europe about Societe Generale's derivatives business. The company said it would not comment on market talk regarding the bank's derivatives operations. BP began capturing some oil spewing from the ruptured oil well in the Gulf of Mexico. The company put off a decision on whether to pay its next quarterly dividend as some politicians have demanded. BP closed down 5.3 percent at $37.16.

Payroll Numbers Disappoint

the Labor Department reported on Friday that nonfarm payrolls rose by 431,000 jobs, as private employment, a barometer of underlying labor market strength, climbed just 41,000. That put the numbers well below expectations, but even so analysts said they did not believe the economy would slip back into recession. Company work forces are already spread too thin, and companies cannot increase working hours indefinitely to maintain output, they said.

However, disappointment over the jobs helped drive the indexes to their lowest close since February on fears the economy will recover only by fits and starts. The blue chip Dow Jones industrial .DJI closed below the 10,000 level. Hints that Hungary had little chance of avoiding a Greek-style debt crisis also hurt sentiment.

Prices for U.S. government debt jumped as investors sought safety, and the dollar hit new four-year highs against the euro.

Also on Friday, the chief executive of Wal-Mart said the still-weak labor market is affecting customers of the world's largest retailer, even as the company said it will hire more than 500,000 workers in the next five years in the United States and around the globe.

"I would not say that I could predict that there will be any decline" in the economy, Wal-Mart CEO Mike Duke said. "But I still sense a great deal of pressure on the customer base."

The financial markets had set investors up to expect private employers to add 190,000 jobs in May after increasing by 218,000 in April. Last month, the government hired 411,000 workers for the decennial population count, the dominant factor behind the largest increase in payrolls since March 2000.

It was the fifth monthly increase in employment. The report also showed the unemployment rate dropped to 9.7 percent from 9.9 percent in April, although the decrease reflected workers leaving the labor force. Payrolls had been expected to rise 513,000, with the jobless rate dipping to 9.8 percent.

President Barack Obama, whose popularity has been dented by high unemployment, told workers in Maryland the labor market and economy were still moving in the right direction.

"While we recognize that our recovery is still in its early stages and that there are going to be ups and downs in the months ahead, this report is a sign that our economy is getting stronger by the day," he said.

However, public anxiety over unemployment and the broader economy could cost the Democratic Party dearly in November's congressional elections, with voters in an anti-incumbent and anti-Washington mood.

The high jobless rate also suggests the U.S. Federal Reserve will be in no rush to raise benchmark interest rates.

Payrolls data for March and April was revised to show 22,000 fewer jobs created than previously reported. The report showed that in May employers opted to increase hours rather than hire new workers.

The average workweek increased to 34.2 hours from 34.1 hours in April. Manufacturing workers saw their workweek rise 0.3 hour to 40.5 hours.

Analysts said the gain in hours was positive as employers will first increase working hours before adding payrolls. Longer working hour will also support second-quarter growth and mean more money, which is good for consumer spending.

The economy has now grown for three straight quarters and the recovery from the worst recession since the Great Depression of the 1930s remains on a moderate upward path.

The growth in the economy, however, has been insufficient to bring the 15 million jobless Americans back into the work force, 46 percent of whom had been without a job for six months and more in May. With unemployment remaining stubbornly high, Americans are increasingly relying on government help for basics. In March, a record 40.2 million people were receiving food stamps, the Agricultural Department said on Friday.

Outside the census, hiring slowed significantly in May from the prior months. The dominant services sector saw payrolls increase 37,000 after surging 156,000 in April.

In the goods-producing sector, there were only 4,000 jobs created in May following 62,000 jobs in April. Construction employment fell by 35,000 after gaining 14,000 in April.

Recruitment for the population count saw government employment rising 390,000, overshadowing the drag from job cuts in cash-strapped states and localities. Job growth is critical to sustain a rebound in consumer spending, especially now that recovery in Europe is under threat from government spending cuts to bring down huge budget deficits.