Shockingly Weak Job Creation In May Hammers Stocks

A shockingly weak jobs report hammered U.S. equities Friday, as major stock indexes headed for their worst loss of the year and erased all of their 2012 gains.

In addition, Wall Street analysts now see a strong likelihood that the U.S. central bank will take steps to stimulate the flagging recovery.

Nonfarm payrolls increased by 69,000 in May, the U.S. Labor Department said Friday. That's the smallest gain in a year and fewer than one-half of the consensus forecast. Economists polled by Reuters had expected nonfarm payrolls to increase 150,000.

The unemployment rate rose to 8.2 percent for May from 8.1 percent for April -- its first increase in 11 months -- as people re-entered the workforce.

While March and April's initial estimates disappointed the market, at least there was hope for upward revisions. However, Friday's report showed employers added 49,000 fewer jobs than previously estimated in March and April, putting a stop to that trend.

More important, the direction of the revision is indicative of the trend in the jobs market and the U.S. economy. Net revisions were very negative during the financial crisis in the fourth quarter of 2008, but they turned positive as the economy began to heal.

Shortly after the report came out, stocks began falling. By late afternoon, the Dow Jones Industrial Average was off 270.83, or 2.19 percent, to 12,122.62, the S&P 500 was down 30.69, or 2.34 percent, to 1,27964 and the tech-heavy Nasdaq Composite was off 73.50, or 2.6 percent, to 2,753.84.

The yield on the benchmark 10-year Treasury fell to a record low 1.47 percent.

European stocks dropped as well. France's CAC 40 fell 2.2 percent, and Germany's DAX plunged 3.4 percent.

Morgan Stanley issued a statement changing its outlook on the possibility that the Federal Reserve would engage in more monetary accommodation.

Previously, we thought the likelihood that the Fed would provide additional accommodation over the next few months (a third round of quantitative easing or a second round of Operation Twist) ... was close to 50-50 and highly event- and data-dependent, analyst David Greenlaw said in a note. We now see a very high probability (80%) that the Fed will take action at the June [Federal Open Market Committee] meeting, and it will probably be QE3 rather than OT2.

Prospects the Fed and other major central banks will intervene to support the global economy sent recently beaten-down gold prices up, and shares of gold-mining stocks rocketing higher. Gold for August delivery on the Comex, the most actively traded contract, jumped more than 4 percent to $1,630 per ounce. The key index of big gold-mining companies, the NYSE ARCA Gold Bugs Index shot up 6.39 percent.

Prospects of central-bank action also weighed on the dollar, which fell 0.31 percent, as measured by the U.S. Dollar Index.

Other analysts suggested that the day's collapse may augur a floor on stock prices that presages a rebound.

Sometimes at the end of intermediate- to long-term declines, you need at least a mini if not major capitulation to get rid of the last weak holders and allow for longer-term investors to acquire stocks at depressed levels, Mark Arbeter, chief technical analyst for S&P Capital IQ, said in a note. We may be seeing that final flush out of stocks with today's lousy performance, which was driven by a U.S. headline.