U.S. stocks closed lower for the first time in five sessions on Wednesday, depressed by profit taking fueled by weaker-than-expected data on factory orders and the services sector. Also negative was an ADP report showing a 532,000 drop in private-sector employment in May.
Among equity groups, energy issues slid with oil futures on a surprise increase in oil inventory levels. Basic material and industrial issues also tumbled.
Weaker-than-expected reports on factory orders and the services sector also gave investors an excuse to take profits.
On Wednesday, the Dow Jones industrial average finished lower by 65.59 points, or 0.75%, at 8,675.28. The broad Standard & Poor's 500 index was down 12.98 points, or 1.37%, at 931.76. The tech-heavy Nasdaq composite index fell 10.88 points, or 0.59%, at 1,825.92.
Treasuries and the dollar index rose. Gold fell.
Analysts say that while economic data lately have signaled improvements, the market may need to see actual signs of growth before it can move much higher.
Federal Reserve Chairman Ben Bernanke testified on the economy before House Budget Committee Wednesday. Bernanke said the jump in Treasury yields appeared to reflect concerns about large deficits, optimism on the economy, growing risk appetite and mortgage hedging. He noted that we need to start planning now to restore the fiscal balance, though that's pretty much out of his hands other than attempting to persuade Congress and the Oval Office. He expects the economy to bottom out and rebound later this year, though delivering below potential growth for some time.
Bernanke expects inflation to remain low despite the rebound on oil and commodities, with declines limited by the improving economy and stable inflation expectations. He sees greater confidence in the financial sector and expects more recapitalization in the sector.
In discussing the Fed's exit strategy, the Chairman said that the Fed could raise interest rates by raising rates on bank reserves, even with a large balance sheet. If worst came to worst, the Fed could always sell assets, though that's not a major plank of its current strategy. He reaffirmed the Fed's commitment to price stability and expectations the government will be out of the financial markets within "4 to 5 years."
Credit Suisse removed its overweight rating on stocks and warned that the back-up in bond yields threatened to undermine the recovery, turning positive on bonds as a result.
In economic news Wednesday, the U.S. ISM-NMI composite index rose only marginally to 44.0 in May (median 45.0) from April's reading of 43.7. Among components, business activity dropped to 42.4 from 45.2. New orders slipped to 44.4 from 47.0. Employment picked up to 39.0 from 37.0. And the prices index jumped to 46.9 from 40.0.
U.S. factory orders rose 0.7% in April, from the -1.9% decline in March (revised from-0.9%). Excluding transportation, orders were up 0.1%. Shipments fell 0.2% after a in March 1.8% decline. Inventories dropped 1.0% following a 1.2% March decline (revised from -1.0%). The inventory-shipment ratio (IS) edged down to 1.45 from 1.46.
The U.S. ADP employment survey revealed a 532,000 drop in private sector jobs in May. However, the pace of job losses in April was revised down to 545,000 from 491,000. The data should help firm up projections for Friday's May payrolls report, where economists expect a 500,000 slide.
The Mortgage Bankers Association released its Weekly Mortgage Applications Survey for the week ended May 29. The Market Composite Index, a measure of mortgage loan application volume, was 658.7, down 16.2% on a seasonally adjusted basis from 786.0 one week earlier. This week's results include an adjustment to account for the Memorial Day holiday. On an unadjusted basis, the Index fell 32.5% vs. the previous week and rose 14.4% vs. the same week a year earlier. The Refinance Index fell 24.1% to 2953.6 from 3890.4 the previous week and the seasonally adjusted Purchase Index increased 4.3% to 267.7 from 256.6 one week earlier.