MarketView for June 2

Summary  

Wall Street ended a volatile day of trading on Thursday as the Street waited to see what a critical labor market report that will be released by the Labor Department on Friday would look like. The big question being whether or not it will magnify the concern that felt by many that the economy is undergoing a substantial retraction with regard to level of growth that was being ballyhooed only a few short months ago. Volume continued to remain low as about 7.2 billion shares changed hands on the three major exchanges, a number that was once again well below last year's daily average of 8.47 billion shares.

Friday's non-farm payroll report is expected to show 150,000 jobs were added in May, according to a Thomson Reuters poll of economists. Wednesday's weak reading by ADP on private payroll growth prompted many economists to scale back forecasts, sparking the stock market's worst day in nearly a year.

Early selling picked up after the S&P 500 broke through its May low of 1,311.08, though news of progress on a new debt plan for Greece sparked a rebound. Still, the three major equity indexes have been trending downward and investors worry about more losses if economic figures disappoint. Another decline could open the window to a move back to the April low at 1,294, and the March lows near 1,250 to 1,260, the index's 200-day moving average.

Bank stocks stabilized after falling on news that Goldman Sachs was subpoenaed by New York prosecutors seeking information on its role leading into the global financial crisis. Goldman's shares closed down 1.3 percent at $134.38.

Education stocks rallied on heavy volume after U.S. officials relaxed rules that could have cut off tuition aid to programs run by for-profit colleges. As a result, DeVry closed up 14.6 percent at $61.86, while Apollo ended the day up 11.1 percent at $46.87.

Initial jobless claims fell by 6,000 claims to a seasonally adjusted 422,000 claims in the latest week.

Moody's Investors Service said there was a small but rising risk of a short-lived default by the United States if the government's debt limit was not increased in coming weeks.

Retailers reported growth in May same-store sales, although the level of growth was less robust than expected. Gap’s shares ended the day down 4.1 percent at $18.12, while Costco closed down 1.5 percent at $79.

Online coupon company Groupon filed to raise up to $750 million in an initial public offering in the latest in a series of Internet companies to tap the capital markets.

New Unemployment Insurance Claims Are Of Concern

The number of new claims for unemployment insurance fell only slightly last week, doing little to calm growing fears of a pullback in the economy's recovery. Initial claims for state jobless benefits fell by 6,000 claims to 422,000 claims, the Labor Department reported on Thursday. The lack of a more substantial decline appears to coincide with other economic data consumer spending and manufacturing that are showing the economy as having  taken a decisively weak tone. This comes as the Federal Reserve prepares to wrap up its $600 billion government bond-buying program.

While the current view is that the so called “soft patch” is transitory, there are nonetheless rapidly growing concerns that slowdown is becoming greater and more of a concern than had been realized previously. One key indicator is that Initial claims have now been above the 400,000 mark for eight weeks in a row. The 400,000 level or below is considered key to economic growth on a continuing basis. The jobs numbers being released on Friday falls outside the survey period for the closely watched non-farm payrolls data for May to be released on Friday.

Much of the slowdown in growth has been blamed on high commodity prices, bad weather and supply chain disruptions from the March earthquake in Japan, which are all seen as transitory. Nonetheless, high food and gasoline prices have cut into sales at major chain stores in May, with retailers such as Target, Gap and J.C. Penney all reporting sales below analysts' expectations. Although sales at stores open at least a year did increase by 4.9 percent in May.

In another troubling sign, a survey of 733 small businesses released on Thursday showed their hiring stalled in May. The National Federation of Independent Business said its survey found that the average number of net new jobs slipped to 0.01 per firm from 0.04 in April. However, the situation may improve. The Labor Department confirmed on Thursday that business productivity braked sharply in the first quarter, suggesting employers have no choice but to hire to keep pace with demand.

Productivity grew at a 1.8 percent annual rate in the first quarter, the department said. While that was up from the previously reported 1.6 percent pace, it was well below the 2.9 percent pace set in the fourth quarter.

The report also showed wage growth remained muted, with unit labor costs -- a measure of how much it costs for the labor needed for any given amount of output -- rising at a downwardly revised 0.7 percent rate.

Yet, the economy's slowing pace was also underscored by a third government report showing factory orders fell 1.2 percent in April.

EU Agrees…In Principle

Greece is set to impose a deeper round of austerity cuts on its struggling economy and promise to speed up a privatization drive in return for a new international bailout to avoid a debt default. Prime Minister George Papandreou will present his side of the deal, a medium-term budget plan, on Friday when he meets the chairman of euro zone finance ministers -- the people who must stump up much of the planned new funding along with the IMF.

Senior euro zone officials meeting in Vienna agreed in principle to a new three-year program for Greece to run until mid-2014. This would effectively supersede a 110 billion euro ($159 billion) rescue Greece agreed with the European Union and IMF a year ago.

But whereas taxpayers have so far borne the brunt of rescuing Greece and fellow euro zone members Ireland and Portugal, the new deal would involve some participation of private sector investors. Some European politicians have argued that investors who bought Greek government bonds will have to share that burden, perhaps in the form of cutting the value of their debt.

The European Central Bank has fought such an idea, fearing this could provoke a crisis among European banks which hold large sums in Greek debt, and lead to a violent reaction on financial markets far beyond Greek borders. However, participation of private sector investors in the new deal would likely be limited to avoid triggering a "credit event."

Athens, which is struggling to lower its budget deficit, let alone its 340 billion euro debt mountain, hasn't got a done deal yet. Anything agreed by the officials in Vienna must be approved by the euro zone finance ministers, some of whom represent electorates which are hostile to any more aid to Greece.

Greeks are already suffering under waves of austerity imposed after Athens had to seek its first bailout from the European Union and IMF a year ago. As a result, thousands of protesters gathered in front of parliament on Thursday night for the latest in a series of nightly demonstrations staged for more than week. Booing and whistling, they waved their open hands at parliament, an offensive gesture in Greek culture, and shone lasers at the building.

Apparently, Athens has agreed to 6.4 billion euros of new measures that will reduce its 2011 budget deficit. Greece's original bailout deal has hit a problem. That agreement assumed that Athens could resume borrowing on markets next year, using the money to fund part of its budget deficit. However, the likelihood of that happening is virtually none existent.

On Wednesday Moody's downgraded Greece to Caa1. That put Greece -- a member of the euro zone which groups some of the most advanced economies in the world -- on a par with Cuba. Moody's currently rates only one country lower -- Ecuador, which defaulted on $3.2 billion of debt in 2009.

Athens needs funds fast. This month it is due a fifth, 12 billion euro tranche of the old bailout loan, needed to pay 13.7 billion euros of immediate funding needs. However, that money has hinged on the "troika" team of IMF, EU and ECB officials declaring it has met targets for reducing its budget deficit.

Athens has already promised to raise 50 billion euros from privatization by 2015, but not once cent's worth of assets has been sold in the past year. The government has decided to sell a further 10 percent stake in Greece's former monopoly telecoms company, but this modest sale is covered by a 2008 deal.