MarketView for June 5

Summary 

The major equity indexes took a bit of a beating on Wednesday, falling about 1 percent as the Street grappled with concerns that the Federal Reserve may begin to scale back its bond-buying stimulus while the economy is still sluggish. Selling was broad-based, with all but two of the S&P sectors down more than 1 percent. The materials index fell 2.1 percent as the day's worst performer.

The benchmark S&P 500 has now fallen 3.6 percent since its all-time closing high on May 21, a day before Fed Chairman Ben Bernanke said the U.S. central bank may decide to taper its stimulus in the next few policy meetings if data shows the economy is gaining traction.

The Dow Jones Industrial Average and the Nasdaq registered their largest percentage declines in about six weeks, while the S&P 500 came close to breaking below its 50-day moving average at 1,604, a possible signal of more bearish sentiment.

Economic data has been mixed, which has left investors caught between fears the Fed will reduce its stimulus and worry that the economy is still weak. A private sector report showed companies had picked up the hiring pace in May, though job growth remained sluggish.

The Fed's Beige Book report did little to change the day's trend. The report said the economy expanded at a "modest to moderate" pace since mid-April while hiring remained relatively subdued. The government's monthly employment report, a key economic indicator, is scheduled for Friday.

Apple fell 0.9 percent to $445.11 after Samsung Electronics received a favorable ruling in the rivals' long-running dispute over mobile device patents.

A total of 4.87 million puts and 3.08 million calls changed hands in the ETF sector on Wednesday, above the combined recent daily average of 6.32 million contracts, according to options analytics firm Trade Alert.

In the SPDR S&P 500 Trust, traders exchanged a total of 3.76 million contracts, with puts outpacing calls by a factor of nearly 2 to 1, data from Trade Alert show. The most active option was the June $160 strike put, with volume of 149,195 contracts traded. Shares closed down 1.5 percent at $161.18.

Approximately 7 billion shares changed hands on the three major equity exchanges, a number that was above the average daily closing volume of about 6.36 billion shares this year.

Factory Orders Disappoint

The Commerce Department issued a report on Wednesday indicating that new orders for manufactured goods increased 1 percent. March's orders were revised to show a 4.7 percent decline instead of the previously reported 4.9 percent tumble. Manufacturing has been hit by a combination of deep government spending cuts and slowing global demand, especially in China and the recession-hit Europe.

The report indicated that factory orders were lifted by an 8.4 percent jump in transportation equipment on the back of strong orders for automobiles, and civilian and defense aircraft.

Orders excluding the volatile transportation category slipped 0.1 percent after falling 2.8 percent in March. Outside transportation there were gains in orders for machinery, computer and electronic products, primary metals and electrical equipment, appliances and components.

Unfilled orders for manufactured goods rose 0.3 percent and were up 0.8 percent excluding aircraft, a positive sign for factories. Shipments fell for second straight month. Stocks of unsold factory goods edged up 0.2 percent, showing no sign inventories are piling up, which should help the sector in the long-run. Factory inventories account for more than a third of business inventories.

The inventories-to-shipments ratio was 1.31, the highest since June 2012, and up from 1.30 in March. The unfilled orders-to-shipments ratio increased to 6.26 from 6.21.

The Commerce Department also said orders for durable goods, manufactured products expected to last three years or more, rose 3.5 percent instead of the 3.3 percent increase reported last week. Durable goods orders excluding transportation were up 1.5 percent rather than 1.3 percent.

Service Sector Slightly Higher

Activity in the services sector picked up slightly in May, though growth was still lackluster and a measure of employment fell to its lowest level in close to a year, an industry report showed on Wednesday. The Institute for Supply Management said its services index edged up to 53.7 last month from 53.1 in April, coming in above economists' expectations for 53.5.

A reading above 50 indicates expansion in the sector. The May reading was still off this year's peak so far of 56.0, which was hit in February. The forward-looking new orders component rose to 56.0 from 54.5, though the employment measure slipped to the lowest level since last July at 50.1 from 52.0.

Both overseas and domestic demand appeared to cool with the exports index falling to 50.0 from 53.5, while imports tumbled to 49.5 from 58.5.

Unit Labor Costs Fall

A gauge of labor-related costs fell in the first quarter by the most in four years, although the reading appeared to be distorted by a shift in employee compensation during the prior period to avoid a tax hike. Specifically, unit labor costs fell at a 4.3 percent annual rate during the period, revised readings from the Labor Department showed on Wednesday. The government had initially estimated a 0.5 percent gain, and the downward revision confounded analysts' expectations that the reading would remain unrevised.

However, the government revised sharply higher its estimates for employee compensation during the fourth quarter after incorporating new data sources. That brought the readings more in line with other indicators of wages which have suggested that employers pulled forward compensation for staff into the fourth quarter so that employees would pay taxes on that income at 2012 tax rates. Washington raised tax rates in January.

Still, the figures show minimal inflationary pressures. Unit labor costs were up 1.1 percent in the year through the first quarter. That suggests the U.S. Federal Reserve has plenty of room to keep interest rates low, although signs of stronger job creation have boosted expectations the Fed could begin reducing its monetary stimulus this year.

Wednesday's report also showed that nonfarm productivity rose modestly in the first quarter, increasing at a revised 0.5 percent annual rate.