MarketView for June 3

Summary 

It was another volatile day on Wall Street on Monday as share prices rallied late in the trading day on the heels of economic data indicating that manufacturing activity contracted for the first time in six months, thereby raising concerns regarding the health of the current economic recovery and the outlook for central bank stimulus.

Wall Street has become particularly sensitive to economic data since the Federal Reserve started to raise the prospect of scaling back its bond-buying program if the economy shows it is on a sustainable growth path.

The Institute for Supply Management reported that its gauge for new orders slipped last month and said there was less demand for exports. The manufacturing data raised doubts about at least a tapering off of Fed stimulus measures, which many in the foreign exchange market were betting on. However, Wall Street, at least for now, likes the idea that the Fed could maintain measures to keep growth on track.

The Nasdaq composite index fell as much as 1 percent at the session trough but later recovered. The Dow Jones Industrial Average rose, however, helped by a 4 percent jump in shares of Merck following the results of a melanoma drug study.

As is the case at the beginning of every month, the Street is also eying Friday's monthly non-farm payrolls data, and the resultant price swings we are likely to see throughout the week.

While Monday's data was important, the clear focus across financial markets is the payrolls report for May, which may guide the Fed's thinking on its monetary stimulus more than any other report. The Street is looking for 170,000 jobs being added last month, slightly above the 165,000 added in April, according to a Reuters poll.

If the payrolls report is strong, the dollar could rally. The dollar fell below 100 yen, its lowest level in nearly a month, after the U.S. manufacturing report prompted investors to search for safer havens. It lasted traded at 99.48 yen.

Markets in Asia and Europe were rattled early in the global session by data showing China's economy lost steam last month, with factory activity shrinking for the first time in seven months and slower growth in services.

Turkish shares plummeted more than 10 percent after riots across the country. The Istanbul bourse fell to its lowest level since February 26 after several days of anti-government protests.

Earlier, a brighter-than-forecast reading on PMI data from Europe drove a rebound in top European shares, though they fell after the U.S. ISM data.

Prices for U.S. 30-year Treasuries traded flat for the most part, paring early gains made after the disappointing manufacturing data as investors trimmed bets the Fed might scale back its bond purchases this year. The 10-year Treasury note last traded 2/32 higher in price with a yield of 2.1229 percent. Prior to the ISM data, it was down as much as 15/32 in price with a yield of 2.187 percent, about 5 basis points below the 13-month-plus peak set last week.

Oil and commodity markets were also volatile. Brent crude oil dipped briefly below $100 a barrel for the first time in a month on worries about demand after the Chinese factory data pointed to slowing momentum in the world's second-biggest oil consumer. However, the losses were outweighed by a problem with the North Sea Buzzard oilfield, and Brent crude rebounded $1.69 to $102.08.

Domestic oil rose $1.31per barrel to $93.28, with the weaker dollar helping support higher oil prices. Oil is priced in dollars and when the dollar sinks, oil becomes less expensive for holders of other currencies.

Gold was up 2 percent at the peak, hitting its highest price in more than two weeks, boosted by the tumbling dollar and the poor manufacturing data.

Purchasing Managers Index Up Slightly

The manufacturing Purchasing Managers Index (PMI) rose to 52.3 in May from 52.1 in April, which was better than the preliminary reading of 51.9. A reading above 50 indicates expansion.

Growth in output eased for the third straight month, with the sub-index slipping to 52.7 from 53.7, while the pace of hiring in the sector fell to a six-month low.

The gauge of new orders from domestic clients rose to 53.3 from 51.5, helping the main index improve slightly on April's result. That also helped make up for a decline in overseas orders, which fell for the first time in three months. Slower growth in the factory sector was likely to contribute to weaker economic growth in the second quarter.

ISM Number Falls To June 2009 Level

The Institute for Supply Management said Monday that its index of manufacturing activity fell to 49 last month from 50.7 in April. That's the lowest level in nearly four years and the first time the index has dipped below 50 since November. A reading under 50 indicates contraction.

A gauge of new orders fell to 48.8, its lowest level in nearly a year. Production and employment also declined.

Manufacturing has struggled this year as weak economies abroad have slowed exports and businesses have reduced their pace of investment in areas such as equipment and computer software. At the same time, consumers are holding back on spending more for factory-made goods, possibly a reflection of higher Social Security taxes that have reduced paychecks this year.

A separate report Monday said a measure of Chinese manufacturing dropped last month to 49.2 from 50.4 in April. As with ISM's index, a reading below 50 indicates contraction. The figure added to signs that a resurgence of China's economy, the second-largest globally after the United States, might be losing momentum.

Europe remains mired in recession and is buying fewer of our goods. In the first three months of the year, exports to Europe fell 8 percent compared with the same period a year ago.

After a steep fall in March, companies in April stepped up their orders for machinery, electronic products and other equipment that reflect their investment plans. Overall orders for so-called durable goods jumped 3.3 percent in April from the previous month.

Much of the April gain reflected new orders for commercial aircraft. However, excluding the volatile transportation sector, which includes aircraft and autos, orders rose 1.3 percent in April, a large turnaround after a decline in March.

Jeremy Siegel Still the Bull

Stocks have not yet broken out of their long-term upward trend, keeping the Dow Jones Industrial Average (Dow Jones Global Indexes: .DJI) on track to reach an all-time high of 17,000 in 2013, Wharton School economics professor Jeremy Siegel said Friday.

For the market to be down "only a couple of percentage points" was "huge," he said, calling it "a sign of strength."

On CNBC, Siegel said that the market was in a bit of a win-win situation now with regard to the Federal Reserve's monetary policy.

If economic data remains weak, the market will see it as a sign of continuing quantitative easing, which would be positive for stocks, he argued. In the event of strong economic data, that would bode well for the stock market in the second and third quarters.

"I like the market here," he added.

The bullish professor of finance maintained his Dow target of 17,000 for 2013. He previously said that the index could hit 18,000 by the end of 2014.

Siegel also brushed off concerns about earnings per share. "I don't think we should quibble with EPS ... because of buybacks," he said. Looking at stock price action, Siegel added, "It has not broken the primary trend."