Stocks ease, Treasury yields slide as markets weigh risk of economic slowdown

May 5, 2011 2:40 PM PT

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Nervousness about the economy clipped the stock market Thursday while driving some investors back to the classic haven of U.S. Treasury bonds, as Wall Street awaited the government’s report on April employment.

The Dow Jones industrial average ended down 139.41 points, or 1.1%, to 12,584.17, in a session that took its cue from a dramatic sell-off in commodities. Energy stocks led the equity market lower as crude oil in New York dived $9.44, or 8.6%, to $99.80 a barrel -- the first close below $100 since March 16.

Treasury bond yields tumbled, with yields on some securities falling to their lowest level of the year. The 10-year T-note yield (charted below), a benchmark for mortgage rates, sank to 3.15%, down from 3.22% on Wednesday and the lowest since Dec. 7.

Once again Treasury securities are benefiting as investors look for a hiding place, even though the bonds’ low yields offer little return, and despite fears about what will happen in the market when the Federal Reserve ends its $600-billion bond-buying program June 30.

Concerns about the economy were fueled by the government’s report that first-time claims for unemployment benefits surged 43,000 to 474,000 last week, the highest level in eight months and the second straight increase.

Although special factors exaggerated the jump in claims, the report still was enough to spook some investors -- particularly ahead of the April employment report, considered the most important monthly economic statistic. Economists surveyed by Bloomberg News expect nonfarm payrolls to rise by a net 185,000 jobs in April.

The jobless-claims data also gave commodity investors and traders the perfect excuse to flee a market that had already weakened substantially in recent days, as prices began to descend after rocketing for most of the last eight months.

If the economy hits a soft patch, it would probably take high raw-materials prices down with it. And of course, those same high prices, particularly for oil, can sow the seeds of their own destruction by acting as a drag on consumption.

The Thomson Reuters/Jefferies CRB index of 19 major commodities slumped 17.56 points, or 4.9%, to 341.07. Since reaching a 31-month high April 29, the index has tumbled 8%.

In hot markets, “Buying begets buying and selling begets selling,” said Quincy Krosby, chief market strategist at Prudential Financial in Newark, N.J.

The stock market fell for a fourth straight day, but losses were muted by surprising strength in April retail sales reports and by expectations that what’s bad for commodities could be good for consumers and for many companies. The Dow recovered from a drop of 202 points at its low point.

“If gains in the prices of energy and other commodities were deemed a drag on economic growth, then their simmering down must be the opposite,” said Tony Crescenzi, an investment strategist at bond giant Pimco in Newport Beach.

Falling oil prices naturally are a big plus for airlines and other transportation companies. The Dow transporation-stock index rose 1.1% for the day, even as most indexes lost ground.

The Standard & Poor’s 500 index (charted at right) fell 0.9% to 1,335.10, but it was weighed down by energy stocks, which fell 2.2% on average. Sectors including technology and industrial issues posted relatively modest losses.

Strong first-quarter earnings reports have helped underpin stocks despite economic jitters. The S&P 500 index is off just 2% since reaching a three-year high last Friday.

But that puts even greater importance on the April employment report Friday to back up the bullish case for the economic recovery.

-- Tom Petruno

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