MarketView for June 7

Summary

The S&P 500 ended the day on Thursday barely changed as optimism regarding China's interest-rate cut was offset by Federal Reserve Chairman Ben Bernanke's comments that reduced hopes for additional stimulus. The major equity indexes fell after the content of Bernanke’s comments to Congress reached the Street.

Bernanke, in testimony Thursday, said the Fed was ready to take action but gave no hint of imminent steps. His remarks were seen as offsetting more supportive comments from other Fed members in the last 24 hours, but still leaving the door open for more action at the Fed's next meeting on June 19-20.

The surprising move by China's central bank to cut its benchmark interest rate by 25 basis points helped ease worries about faltering global demand. Speculation has been rising that central banks will take more action to combat escalating debt problems in Europe and slower global growth. The rate cut in China helped lift the stocks of U.S. companies linked to China's commodity-hungry industrial complex.

While Europe was still very much in the spotlight, stocks showed little reaction to a downgrade by Fitch in Spain's credit rating to 'BBB' with a negative outlook, just two notches away from junk status.

Among the day's decliners, shares of Navistar International fell 14.3 percent to close at $24.11 after it posted a second-quarter loss, due to a big charge for warranty costs to repair engines built in 2010 and 2011. The truck maker also cut its full-year earnings outlook.

Molina Healthcare recalled its 2012 earnings guidance, citing uncertainties regarding medical costs in Texas, pushing its stock down 31 percent to $17.77.

On the Nasdaq, shares of Nvidia fell 4 percent to $11.89 after FBR cut its price target on the company. Meanwhile, volume was above average with about 7.16 billion shares changing hands on the three major equity exchanges, compared with the year-to-date daily average of 6.85 billion shares.

Unemployment Insurance Claims Fall

The number of new claims for jobless benefits fell last week for the first time since April, a hint that a slowdown in hiring last month may only be temporary. The data on state unemployment claims, released by the Labor Department on Thursday, takes some of the edge off a report by the government last week that showed job creation slowed sharply in May. In fact, many economists believe that the mild weather in the winter led employers to hire more workers then at the expense of spring, but the weather effect should be temporary. Some economists suggested the claims data backed that view.

Four consecutive months of slowing job creation had fueled speculation the Federal Reserve would ramp up efforts to prop up the U.S. economy. However, in congressional testimony on Thursday, Fed Chairman Ben Bernanke offered few hints that further monetary stimulus was imminent, even though he said the Fed was ready to shield the economy if financial troubles mount.

The Labor Department said initial claims for state unemployment benefits fell by 12,000 claims to a seasonally adjusted 377,000 claims last week. Prior to last week, claims had risen for four consecutive weeks, adding to concerns over several months of lackluster hiring data. Still, most of the recent increases in new jobless claims were marginal, and the overall level of new aid applications has held at levels consistent with a modest labor market recovery.

Last week's decline in U.S. jobless claims was the first drop since the week ended April 28. The four week new claims moving average, a measure of labor market trends, increased by 1,750 claims last week to 377,750 claig.

The government said on Friday that job growth slowed in May for the fourth straight month, heightening concerns that the deepening debt crisis in Europe and a slowdown in China were starting to dampen an already lackluster U.S. recovery.

Bernanke said the hiring slowdown could reflect the warm winter weather or, more troublingly, suggest the economy was simply growing too slowly to make a big dent in unemployment.

Bernanke Offers Little

Federal Reserve Chairman Ben Bernanke said on Thursday the Fed was ready to shield the economy if financial troubles mount, but offered few hints that further monetary stimulus was imminent. Bernanke told Congress the Fed was monitoring "significant risks" to the recovery from Europe's debt and banking crisis closely.

However, for financial markets hungry for clues about the prospect for a third round of Fed bond buys, Bernanke's testimony disappointed. "The Federal Reserve remains prepared to take action as needed to protect the U.S. economy in the event that financial stresses escalate," Bernanke told the Joint Economic Committee.

Yet Bernanke's tone was far from crisis mode. Indeed, he sounded somewhat sanguine about the outlook. "Despite economic difficulties in Europe, the demand for U.S. exports has held up well," he said.

His comments stood in sharp contrast to those of Fed Vice Chair Janet Yellen, who late on Wednesday made the case for further monetary stimulus to insure against the risk of a downturn.

Bernanke made no such suggestions, but he did tell legislators that tighter fiscal policies set to kick in early next year barring congressional action "would, if allowed to occur, pose a significant threat to the recovery."

Bernanke said he did not want to prejudge the outcome of the Fed's next meeting on June 19-20. He said the main question policymakers will face is: "Will economic growth be sufficient to achieve continued progress in the labor market?"

The Fed has held benchmark interest rates near zero since late 2008 and has expanded its balance sheet sharply to nearly $3 trillion in an effort to keep long-term borrowing costs down. The Fed’s most recent stimulus program, known as Operation Twist, which involves selling shorter-dated Treasury securities and buying longer-term ones, is set to expire at the end of June.

Increase in Consumer Credit

Consumer credit in April expanded the least in six months as people cut back on the use of revolving credit, data from the Federal Reserve showed on Thursday. Consumer credit grew by $6.5 billion. The increase came on the heels of a downwardly revised $12.4 billion increase in outstanding credit in March.

The Fed also released new data on flows of consumer credit, rather than levels. That data, which the Fed says gives a better view of lending related to economic activity, showed the flow of consumer credit cooled to an annual rate of $78.2 billion in April. In March, that rate was $148.4 billion, the Fed said. The flows data also slowed due to a contraction in revolving credit, which includes credit cards.