Treasuries rallied, driving 10-year yields below 1.50 percent for the first time, while the Dow Jones Industrial Average erased its 2012 gain after U.S. employers created the fewest jobs in a year and reports signaled manufacturing growth was slowing. Commodities slumped.
Yields on 10-year Treasuries dropped 10 basis points to 1.46 percent and slid as low as 1.4387 percent. The Standard & Poor’s 500 Index sank 2.5 percent, its biggest drop since November, to a four-month low of 1,278.04. The Stoxx Europe 600 Index slumped 1.9 percent. The S&P GSCI gauge of 24 commodities slipped to the lowest level since October as oil plunged 3.8 percent to an eight-month low of $83.23 a barrel. Germany’s two-year note yield turned negative during the day for the first time ever. Gold and silver rallied.
Concern about the world’s largest economy deepened after U.S. payrolls climbed by 69,000 last month, less than the most-pessimistic forecast in a Bloomberg News survey, after a revised 77,000 gain in April that was smaller than initially estimated, the Labor Department said. The median estimate called for a 150,000 increase in May. The jobless rate rose to 8.2 percent. Other reports showed manufacturing grew less than estimated in the U.S. and China and contracted for a tenth month in the euro region.
“The bond market has reacted to every rainstorm as if it’s a hurricane,” David Kelly, chief market strategist at JPMorgan Funds, told Bloomberg Television. “What’s happened in markets over the last few years is valuations have gotten more and more extreme. In fact I don’t think that there’s been a more extreme day in the relative valuations of stocks and bonds in the last 50 years.”
Treasuries last month had their highest returns since August, returning 1.8 percent, reflecting the declining stability of the 17-member euro currency amid a worsening sovereign debt crisis, according to indexes compiled by Bank of America Merrill Lynch. The MSCI All-Country World Index of shares lost 8.9 percent including dividends, the biggest monthly decline since September. The euro declined 6.6 percent versus the dollar in May, also the most since September.
Thirty-year Treasury bond yields declined 12 basis points to 2.52 percent today and fell to 2.5089 percent earlier, the lowest in Federal Reserve records beginning in 1953. Five-year and seven-year note yields also slid to record lows today.
Valuation measures show Treasuries are at the most expensive levels ever. The term premium, a model created by economists at the Fed, reached negative 0.98 percent, the most expensive level ever. A negative reading indicates investors are willing to accept yields below what’s considered fair value.
The slide in U.S. stocks halted today as the S&P 500 approached 1,277.14. That level would mark a so-called correction, or 10 percent drop from the index’s four-year peak reached on April 2. The S&P 500 dipped as low as 1,277.25 today and closed below its average from the past 200 days for the first time this year.
The S&P 500 is trading for less than 13 times its companies’ reported earnings, the lowest since November, and has been stuck below its five-decade average multiple of 16.4 for more than two years. Losses in stocks accelerated this year after the April 6 employment report from the Labor Department showed the slowest job creation in five months. Today’s report showed employers added the fewest workers in a year, bolstering concern that the job-market recovery is stalling.
“The weak jobs report confirms that the U.S. is vulnerable to a European situation that is going from bad to worse,” said Mohamed El-Erian, the chief executive officer of Pacific Investment Management Co., the largest manager of bond funds. “The report’s details speak to an unemployment crisis that is getting more stubbornly embedded in the structure of the economy. Looking forward, the employment situation will be further challenged by an ongoing synchronized global slowing.”
A manufacturing index released today from the Institute for Supply Management fell to 53.5 after reaching a 10-month high of 54.8 in April. Readings greater than 50 signal growth. The median projection of economists called for a decrease to 53.8 in May.
The Dow average slumped 274.88 points, or 2.2 percent, to 12,118.57, below its level of 12,217.56 at the end of 2011.
Hewlett-Packard Co., Bank of America Corp. and American Express Co. dropped at least 4.3 percent to lead losses in all 30 stocks in the Dow. Wynn Resorts Ltd., MGM Resorts International and Las Vegas Sands Corp. slumped at least 4.3 percent as Macau casino gambling revenue grew at the slowest pace since July 2009. Facebook Inc. slid 6.4 percent to $27.72, erasing yesterday’s 5 percent rally and sliding to the lowest price since the social networking site went public two weeks ago.
The U.S. jobs data extended an earlier global slump in stocks triggered after China led a slowdown in manufacturing across Asia. China’s Purchasing Managers’ Index fell to 50.4 in May from 53.3 in April, China’s statistics bureau and logistics federation said today in Beijing. Economists projected 52, according to the median estimate in a Bloomberg News survey. Measures for India, South Korea and Taiwan also declined.
“As if clear evidence of an emerging market slowdown and Europe’s woes were not enough to contend with, the market will now have to digest one of the nastier non-farm payroll reports we have seen in recent months,” Michael Shaoul, chairman of Marketfield Asset Management in New York, which oversees more than $1.9 billion, wrote in an e-mail to clients.
Gold producers in the U.S. and Canada jumped as the weakening job growth fueled speculation the Federal Reserve will take further steps to spur growth, boosting the appeal of the precious metal as an inflation hedge. Newmont Mining Corp., the largest U.S. gold producer, rallied 6.7 percent. Canada’s S&P/TSX Gold Index jumped 7.4 percent, the most since September 2009, as all 40 of its stocks advanced. Gold for August delivery rose as much as 4.3 percent to $1,632 an ounce.
After today’s jobs report, the Fed is more likely to provide added stimulus when its current effort winds down, according to Morgan Stanley. The probability of more central bank policy action is 80 percent, up from 50 percent, the firm said.
The Stoxx Europe 600 Index lost 1.9 percent today to close at the lowest level since Dec. 19. Spain’s IBEX 35 Index extended its year-to-date decline to 29 percent and closed at the lowest level in nine years. Italy’s FTSE MIB Index lost 1 percent to a three-year low.
The yen rose against 12 of 16 peers as investors sought the perceived safety of the currency. The euro added 0.5 percent versus the yen after earlier falling to its lowest level in more than 11 years versus the Japanese currency as euro-bloc unemployment surged to the highest on record. The yen rose to its strongest in almost four months against the dollar as the premium investors get for investing in U.S. debt over Japanese securities fell to a record.
The Dollar Index, a gauge of the currency against six major peers, slipped 0.2 percent to 82.868 after reaching the highest level since August 2010 yesterday. Wheat, natural gas, cotton and oil led losses in 17 of 24 commodities tracked by the S&P GSCI Index as the commodity gauge extended its year-to-date loss to 9.9 percent.
Spanish and Italian government bonds advanced, outperforming benchmark German bunds, on speculation the European Central Bank may purchase the securities to stem an increase in borrowing costs. Italian 10-year bond yields dropped 16 basis points, or 0.16 percentage point, to 5.74 percent. The yield on similar-maturity Spanish securities slid three basis points to 6.53 percent.
“I imagine there is speculation that the ECB may be forced to move given how much yields have rocketed,” said John Davies, a fixed-income strategist at WestLB AG in London. “But if we were really getting strong speculation that the ECB was intending to step in I think we would be down 30 or 40 basis points.”
An ECB spokesman in Frankfurt declined to comment when reached by phone today.
The MSCI Emerging Markets Index slumped 1.4 percent as benchmark gauges in India, Taiwan, Brazil, Argentina, Colombia and Mexico fell more than 1.5 percent to lead declines.