MarketView for June 6

Summary 

The major equity indexes ended the day higher on Thursday, with the Dow Jones Industrial Average swinging nearly 200 points from its session low to high and the S&P 500 recovering after hitting a key technical level in volatile trading a day before the release of the jobs report.

Around midday, the S&P 500 briefly slipped below its 50-day moving average of 1,604 - the first time the benchmark has dropped below that technical level since April 18. By mid-afternoon, the S&P reversed course and ended the day up 0.9 percent. The S&P 500 is up 13.8 percent so far this year after repeatedly hitting record highs.

Market volatility has increased recently and the S&P 500 has lost 3 percent since Federal Reserve Chairman Ben Bernanke's comments two weeks ago that the central bank may decide to reduce stimulus in the next few policy meetings if data shows the economy is improving. The move follows a rally for much of this year, largely on the Fed's continued stimulus actions.

The Street is looking for the non-farm payrolls report on Friday to show job growth of 170,000 in May, slightly above April's addition of 165,000 positions. The unemployment rate is expected to remain at 7.5 percent. The jobs report will come one hour before the markets open on Friday.

Increased market volatility over the past couple of weeks reflects investors' uncertainty over Fed policy, combined with worries about a still sluggish global economy. At one point during Thursday’s trading, the Dow was down more than 100 points. From its session low of 14,844.22 to its intraday high at 15,040.62, the Dow's swing covered 196.4 points.

All 10 S&P 500 sectors ended higher, though technology was the weakest performer, ending up just 0.1 percent. Among tech's biggest losers for the day were Netflix, down 2.6 percent at $217.74, and Oracle, down 2.3 percent at $33.35.

On the plus side, Regeneron Pharmaceuticals closed up 9.8 percent at $252.17. The stock ranked as the largest percentage gainer in both the S&P 500 and the Nasdaq 100 following news that a late-stage trial of an eye drug it is developing with Bayer  had positive results. Biogen Idec, up 3.3 percent at $221.19, was another health care standout in Thursday's session and helped lift the Nasdaq 100 index.

Defensive sectors such as health care have led gains in this year's rally. But the recent rise in bond yields has made those sectors less appealing since many of them contain stocks with high dividend yields.

Verizon was the Dow's largest percentage gainer, ending up 3.5 percent at $49.97. AT&T was up 1.6 percent at $35.81, also bolstered the Dow. After the close, AT&T updated its second-quarter guidance with projections of strong growth in its wireless customers' ranks. The shares fell 1.5 percent to $35.26 in after-hours trading.

American Express was also among the Dow's top gainers, rising 2 percent to $76.24.

The European Central Bank kept interest rates unchanged on Thursday and left other policy tools untouched after discussing options it could use if the euro zone's economy does not come out of recession later this year. ECB President Mario Draghi said economic conditions did not justify moves such as requiring banks to pay to leave their money with the central bank overnight.

Retail stocks ended the day higher with major retail chains reporting monthly sales that were largely in line with expectations. Shares of Costco ended the day up 1.8 percent to close at $111.09.

Approximately 6.9 billion shares changed hands on the three major equity exchanges, a number that was above the daily average closing volume of about 6.4 billion shares this year.

Jobless Claims Decline

The number of Americans filing new claims for unemployment benefits fell last week, pointing to moderate job growth despite slowing economic activity. Initial claims for state unemployment benefits declined 11,000 to a seasonally adjusted 346,000, the Labor Department said on Thursday. The four-week moving average for new claims, which irons out week-to-week volatility, rose 4,500 to 352,500.

Claims have been volatile in recent weeks, but there is little in the numbers to suggest a shift in the moderate pace of job gains, even though the broader economy is struggling under the weight of higher taxes and deep government spending cuts. Nonetheless, the improvement in labor market conditions lacks enough vigor to compel the Federal Reserve to scale back its expansive monetary stimulus.

The Fed's policy-setting committee meets June 18-19. With data ranging from manufacturing to consumer spending showing the economy hit a soft patch early in the second quarter; it is unlikely the Fed will announce a tapering of the $85 billion in bonds it is buying each month at that meeting.

Despite the slowdown in growth momentum, companies are not responding by reducing their workforces. There is still no sign of layoffs related to the deep government spending cuts.

In a separate report, outplacement firm Challenger, Gray & Christmas said the number of planned layoffs at U.S. firms fell in May for a third straight month. Employers announced 36,398 job cuts last month, down 4.5 percent from April. Layoffs fell 41.2 percent from a year ago.

"So far, the threat of massive job cuts related to federal spending cuts has failed to materialize", said John Challenger, the firm's chief executive officer.

Major U.S. retail chains including Costco Wholesale Corp and Victoria's Secret reported sales increases for May that were generally in line with Wall Street's expectations, other data showed.

Retail Sales Rise

The steady labor market improvement, coupled with rising house and share prices, is helping to support retail sales. Major retail chains, including Costco and Victoria's Secret, reported sales increases for May that suggested consumer spending continues to improve moderately.

Costco said sales at stores open at least a year, or same-store sales, rose 5 percent last month, coming in slightly below Wall Street forecasts because of lower gasoline prices. Fresh food and tools for home repair were strong categories, Costco said.

L Brands, parent company of Victoria's Secret and Bath & Body Works, said same-store sales rose 3 percent, compared with Street expectations of 3.2 percent. The company expects a similar increase in June.

Gap results were lifted by brisk sales at its namesake chain and at lower-price chain Old Navy, with companywide same-store sales up 7 percent, well above expectations.

Same-store sales for the 11 U.S. chains that report May sales rose 4.8 percent against expectations of a 3.7 percent increase for the four weeks ended June 2, according to Thomson Reuters. Gap accounted for almost all of the outperformance.

At its peak in 2006, the monthly same-store sales index included 68 companies ranging from Wal-Mart to Starbucks, making it a much more significant gauge of consumer spending than the current index of 11 companies.

The International Council of Shoppers Centers expects same-store sales to rise 3 percent to 3.5 percent in June, the same pace as recent months.

Costco, which offers its members deep discounts on everything from gas to gardening tools, has been one of the big winners in the recession and the slow recovery that has followed.

Stein Mart, a chain that offers low-cost fashion, has also benefited. Its same-store sales were up 8.2 percent, well above the 2 percent rise analysts projected.

Discount general merchandise chain Fred's showed a smaller-than-expected fall in sales, while teen retailer The Buckle and Walgreen also reported better than expected sales. In addition to Fred's, Cato, said same-store sales fell 2 percent, a smaller drop than expected. American Apparel continued its turnaround and reported a 10 percent increase in same-store sales, the largest gain among the companies reporting.

Rite Aid same-store sales fell 1.5 percent, largely because of the introduction of several generic drugs, which are less expensive for consumers, in the last year. However, sales of general merchandise like toothpaste and greeting cards were higher.