MarketView for June 6

Summary

It was certainly what one would call a “red letter” day on Wall Street on Wednesday, as the three major equity indexes all chalked up a gain of over 2 percent. (If you are wondering what a red letter day means, it is simply an indication of a special day  back as far as 1549 when special days were marked on calendars in red.)

The S&P 500 index its best day since last December, as talk of a rescue of Spain's troubled banks and hopes for more monetary stimulus sparked a rebound from recent selling. After a 6 percent fall by the S&P 500 in May that took the index below its key 200-day moving average on Friday, the market was ripe for a rebound. Buying was strong across the broad market, with all 10 S&P 500 sectors gaining ground.

Both the Dow and S&P 500 had their largest daily percentage increases since December 20. The S&P 500 also held above the psychologically important 1,300 level, while the Dow inched back into positive territory for the year. The S&P 500 is now up 4.6 percent for the year so far, but remains well off its highs of the year.

The energy, financial and technology sectors, all of which are tied to strong global demand, led the day. Among the big banks, shares of Bank of America ended the day up 7.6 percent to close at $7.64. Morgan Stanley ended the day up 8.4 percent, closing at $13.94, both extending gains just ahead of the close.

It seems that both German and European Union officials were seeking solutions for Spain's weakened banks, the latest worry in the fiscally troubled euro zone. Madrid has not yet requested assistance and is resisting political conditions.

European Central Bank President Mario Draghi suggested earlier Wednesday that further stimulus to tackle the euro zone's debt crisis would not necessarily be forthcoming, but speculation persisted that the ECB could act if financial market tensions intensify further. The ECB left interest rates unchanged following its meeting Wednesday.

Meanwhile, Atlanta Federal Reserve Bank President Dennis Lockhart said the central bank may need to consider further monetary easing if our economy falters or Europe's crisis creates more of a financial shock. At the same time, Fed Chairman Ben Bernanke is expected to testify on the economy before a congressional committee on Thursday.

Adding to the day's slightly more upbeat news on the economy, the Federal Reserve said in its Beige Book summary that U.S. economic growth picked up over the two prior months and hiring showed signs of a modest increase.

In other economic news, non-farm productivity fell more than expected in the first quarter as companies gave more hours to employees but only modestly expanded output.

Facebook is making it easier for advertisers to reach the growing ranks of users on smart phones and mobile devices, taking a significant step toward addressing one of investors' most pressing concerns and broadening its appeal to marketers. Facebook’s shares ended the day up 3.6 percent to close at $26.81.

Shares of Halliburton fell 3.5 percent to $28.10 after it said a shortage of materials needed for hydraulic fracturing fluids meant North American profit margins this quarter would be down by twice as much as expected.

Shares of Tempur-Pedic International fell 48.7 percent to $22.39 after the Company revised its full-year forecast.

Volume was above average with about 7.36 billion shares changing hands on the three major equity exchanges, a number that compared favorably with the year-to-date daily average of 6.85 billion shares.

Productivity Falls in First Quarter

According to a revised report by the Labor Department, nonfarm productivity fell more than expected in the first quarter as companies gave more hours to employees but only modestly expanded output. Productivity fell at a 0.9 percent annual rate, a sharper decline than the 0.5 percent initially reported by the government.

Employers slashed payrolls during the 2007-09 recession, helping fuel a spike in productivity. But the increase in output-per-hour faded last year, and productivity has declined in three of the last five quarters.

Stock index futures were up on speculation the European Central Bank could act on the euro zone debt crisis. The euro pared gains against the dollar, while Treasury debt prices were steady at lower levels.

So what will the recent weakness in productivity will mean for the economy? Well, it could show that employers are squeezing about all they can out of their current staffs and will need to boost hiring. However, there is also the possibility that the increase in hiring that began last year will continue to wane.

There is also the possibility that employers went overboard laying people off during the recession, and last year's acceleration in hiring reflected the slowdown in productivity growth.

Federal Reserve officials, including Chairman Ben Bernanke believe companies are now seeking an alignment with the expected demand for their products. Without stronger economic growth, they argue, the pace of hiring will be hard to sustain.

In the first quarter, the productivity report showed output rose at a 2.4 percent annual rate and hours worked climbed at a 3.3 percent rate. Unit labor costs grew at a 1.3 percent rate.

Beige Book is More Optimistic

According to the Beige Book, economic growth in the United States picked up over the last two months and hiring showed signs of a "modest increase," the Federal Reserve said in a report that ran counter to a growing sense of economic gloom.

"Overall economic activity expanded at a moderate pace," the central bank said on Wednesday in its latest "Beige Book" summary of business activity covering a period between early April and late May. The Fed's previous Beige Book assessment of the economy, released on April 11, had painted growth in a more timid light. The central bank also described hiring as steady or modestly increasing, in contrast with a government report last week that showed hiring slowed last month for a fourth straight month.

The Beige Book, prepared this time by the Dallas Federal Reserve Bank based on information collected through May 25, is based on anecdotal reports from business people from coast to coast and will be used by Fed policymakers at their next meeting on June 19-20.

A number of Fed officials indicated over the last few days that their view of the outlook had not shifted enough to warrant a further easing of monetary policy. Congressional testimony by Fed Chairman Ben Bernanke on Thursday will give a clearer sense of whether the central bank's policy panel will hold off taking any new steps.

The Beige Book report also noted inflation pressures appeared to be modest, in part because of a decline in energy prices.