MarketView for June 1

Summary

 

The major equity indexes were down more than 2 percent on Friday, dragging the Dow Jones Industrial Average into negative territory for the year after a dismal jobs report added to fears that Europe's spiraling debt crisis was dragging down the world economy.

 

The S&P 500 index closed at its lowest point since early January and ended below its 200-day moving average for the first time in 2012. A key reason of course was the Labor Department report indicating that employers created just 69,000 jobs last month, the weakest in a year.

 

The bleak May jobs report caps a week of soft economic data from China and growing problems in Europe as Spain's bank crisis deepened. At the same time, the global flight to safety pushed U.S. and German government debt yields to record lows while the VIX rose more than 20 percent for the week.

 

Friday's decline was the largest daily percentage drop for the S&P 500 since November 9, when a spike in Italian benchmark bond yields sent the broad U.S. stock index down 3.7 percent.

 

For the week, the Dow gave up 2.7 percent, the S&P 500 was down 3 percent and the Nasdaq fell 3.2 percent. Financial sector stocks were among the worst hit in Friday's selloff. JPMorgan Chase fell 3.7 percent to $31.93 and Bank of America slid 4.5 percent to $7.02.

 

Homebuilders ranked among the weakest stocks. Pulte Group was down 11.8 percent to $8.26 while D.R. Horton lost 8.4 percent to $15.21.

 

In one of the few positive moves of the day, Newmont Mining was up 6.7 percent to $50.30 and Barrick Gold added 7.3 percent to close at $41.91 as the price of gold scored its biggest one-day rise in slightly more than three years.

 

More than 8.3 billion shares changed hands on the three major equity exchanges, a number that was about 21 percent higher than the year-to-date daily average of 6.85 billion shares.

 

Job Growth Disappoints

 

Job growth braked sharply for a third straight month in May and the unemployment rate rose for the first time in nearly a year, raising chances of further monetary stimulus from the Federal Reserve to support the sputtering recovery.

 

Employers added a paltry 69,000 jobs to their payrolls last month, the least since May of last year, and 49,000 fewer jobs were created in the previous two months than had been thought, the Labor Department said on Friday.

 

The report is troubling for President Barack Obama, whose prospects of winning re-election in November could hinge on the economy's health. Republican opponent Mitt Romney called the report "a harsh indictment" of Obama's policies.

 

The jobless rate rose to 8.2 percent in May from 8.1 percent in April, although the increase reflected more people entering the labor force to look for work, a possible sign of growing confidence.

 

The data offered the clearest evidence yet that the deepening debt crisis in Europe and a slowdown in China were starting to dampen an already lackluster U.S. recovery. Concerns over the course of U.S. fiscal policy may also be weighing.

 

Data from other major economies was also worrisome. Chinese factory output barely rose in May and manufacturing activity in Britain shrank at its fastest pace in three years. Earlier reports had shown factory activity also declined in Germany and France.

 

Stocks on Wall Street ended down more than 2 percent, extending May's rout. The Dow Jones industrial average sank into negative territory for the year.

 

Investors fearful of a global economic slump rushed into the safety of U.S. government bonds, pushing the yield on the benchmark 10-year Treasury note to a record low below 1.5 percent. The dollar fell against a basket of currencies.

 

The broadly weak payrolls report raised the odds of the Fed launching a third round of bond purchases or expanding on other efforts to help the flagging recovery. But many economists said it was unlikely the U.S. central bank would pull the trigger at its next policy meeting on June 19 and 20.

 

Economists had expected payrolls to rise 150,000 and the unemployment rate to hold steady at 8.1 percent.

 

Last week, interest rate futures were pricing in the first rate hike by the end of 2014. On Friday, they shifted that date out to April 2015. Some say there is not much the Fed can do, arguing that interest rates are already too low, and want fiscal policy to take up the slack. That's an unlikely proposition, given opposition to increased government spending and sharp political divisions in an election year.

 

Obama, speaking to workers at a Honeywell plant in Golden Valley, Minnesota, pressed Congress to act on an economic "to-do" list that includes tax incentives for businesses to hire more workers and helping homeowners refinance mortgages.

 

"We've got responsibilities that are bigger than an election," he said. "My message to Congress is now is not the time to play politics. Now is not the time to sit on your hands."

 

The jobs numbers cast doubt on whether the economy has enough momentum to achieve the 2 percent to 2.5 percent growth rate analysts expected this year.

 

Still, the wheels are not falling off the recovery. The Labor Department's survey of households, which tends to be volatile from month to month, showed robust jobs growth in May, although there was a decline in the number of Americans working full time.

 

Separately, a report on the domestic factory sector from the Institute for Supply Management showed activity slowed but still expanded in May and new orders reached their highest point in more than a year.

 

Other data showed an increase in consumer spending in April, despite sluggish wage growth, and a respectable gain in construction outlays. While motor vehicle sales growth slowed in May, the underlying trend remained strong.

 

Unseasonably warm weather had brought forward hiring into the winter months, and had been widely blamed for the step back in March and April.

 

Some economists said the weak reading on jobs growth for May suggested a more fundamental slowdown in the economy. Others were not convinced, saying the strength of hiring in the winter still largely explained the soft jobs growth last month. They cited persistent job losses in construction, despite a rise in home building, and weak employment in leisure and hospitality - all weather-sensitive industries.

 

The consensus is that the economy needs to create roughly 125,000 jobs a month just to keep the unemployment rate steady. The level of employment is about 5 million jobs below where it stood in December 2007, when the economy fell into recession.

 

About 23.2 million Americans were either out of work or underemployed in May. Last month, the private sector added only 82,000 positions. Government payrolls dropped by 13,000, dragged down by belt-tightening by state and local governments. Federal government employment also fell.

 

Construction employment fell by 28,000 jobs in May, the fourth straight decline. Manufacturing, the recovery's star performer, added 12,000 jobs. But the hiring trend is slowing and factory jobs are off their peak of 52,000 in January.

 

Given the high unemployment rate, average hourly earnings rose only 2 cents and the average workweek dipped to 34.4 hours in May. On a year-over-year basis, though, average hourly earnings rose 1.7 percent in the 12 months through May.

 

Worldwide Economic Growth at Risk

 

The worldwide economic outlook was discouraging on Friday as reports showed U.S. employment growth slowing sharply, Chinese factory output barely growing and European manufacturing falling deeper into malaise. In a shock that sent global equity markets into a dive, the U.S. economy added just 69,000 jobs in May, less than half of what is seen as needed to keep the jobless rate moving lower. Readings for the prior two months were also revised down, while the unemployment rate rose for the first time in almost a year, to 8.2 percent.

 

The Labor Department report dealt a blow to confidence in the U.S. economic recovery, which until recently had contrasted with Europe's deteriorating economic situation and seemingly intractable political crisis over government budget deficits.

 

The jobs figures, which raised expectations for another possible round of monetary easing from the Federal Reserve, also carried an important political dimension.

 

Worsening economic conditions were also being felt in major emerging countries such as Brazil and India, causing some economists to wonder just where growth is going to come from.

 

In Britain, manufacturing activity shrank at its fastest pace in three years last month as the global economic slowdown hit demand for its goods. Markit's Eurozone Manufacturing Purchasing Managers' Index dropped to 45.1 in May from 45.9 in April, slightly above a preliminary reading but marking its lowest level since June 2009. It has been below the 50 mark that divides growth from contraction for 10 months. Similarly, the output index fell to 44.6 from April's 46.1, also the lowest since June 2009.

 

U.S. manufacturing proved a bit more resilient, with the Institute for Supply Management's index falling modestly in May but still at a respectable level of 53.5. New orders also rose to their highest since April of 2011.

 

Earlier data from France and from Germany, Europe's largest economy, showed their manufacturing sectors contracted at the fastest pace in nearly three years. It was only German strength that had prevented the euro zone falling into recession in the first quarter. Italy's factories contracted for the tenth straight month, while in Spain the PMI fell below that of Greece's, and posted the lowest reading of all the countries surveyed.

 

The news in Britain, linked inexorably to the fortunes of the euro zone, was little better. The UK economy is mired in its second recession in two years and its PMI plunged to 45.9 last month, its lowest reading since May 2009 and the second-steepest fall in the survey's 20-year history. Analysts had expected a more modest dip to 49.8.

 

The euro zone's economic deterioration prompted more than a third of economists polled by Reuters this week to say the European Central Bank will cut interest rates from their record 1.0 percent low before the end of the year to boost growth.

 

Greece, which unleashed the financial maelstrom that has ravaged the bloc, is due for a crucial second election on June 17 that may determine whether it remains a member of the currency union.

 

Declines in two gauges of China's manufacturing sector were particularly worrisome as the world's second-biggest economy is expected to pick up the slack created by Europe's debt crisis and the sluggish U.S. economy. China's annual economic growth will likely fall to 7.9 percent in the second quarter, the first dip below 8 percent since 2009.

 

The country's official purchasing managers' index - covering China's biggest, mainly state-backed firms - fell more than expected to 50.4 in May, the weakest reading this year and down from April's 13-month high, with output at its lowest since November 2011. That could pile pressure on authorities to attempt further stimulus.

 

India was also feeling the pain. Growth in its gross domestic product slumped in the first quarter to a nine-year low of 5.3 percent as the manufacturing sector contracted.

 

Brazil's economy barely expanded in the first quarter, setting the stage for another disappointing year and casting new doubt on the health of emerging markets. The economy grew just 0.2 percent compared to the final three months of 2011, less than half the pace economists expected. Things look to have remained weak so far in the second quarter too, with HSBC's manufacturing index for Brazil holding steady at 49.3, below the 50 mark that separates growth from contraction.