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Week Ended June 1, 2012

Labor market and eurozone concerns drive stocks sharply lower

Stocks fell sharply for the week as worrisome signs about the U.S. economy compounded growing fears about the future of the eurozone. On Thursday, stocks finished off their worst month in two years. The S&P 500 has experienced a 10% drop from the peak it reached two months ago-the commonly accepted definition of a market correction (as opposed to a "bear market" decline of 20% or more).

Employment data lead to a sharp drop to end the week

Markets saw their biggest declines on Friday, after the government announced that payrolls had grown by only 69,000 in May, the worst showing in nearly a year. Payroll growth was also revised lower for the previous two months, and the unemployment rate increased from 8.1% to 8.2%. T. Rowe Price economists note that while the springtime weakness is partly payback for unsustainably strong job gains last winter, the data do suggest that employers will remain cautious about hiring through the end of the year. A surprising drop in pending home sales, announced Wednesday, added to concerns about the U.S. economy.

Overseas worries continue

A primary factor driving cautious hiring and business spending in the U.S. has been the slowdown overseas, particularly in Europe and China. The week brought little encouraging news on the former front, as rising bond yields in Spain and Italy suggested that some sort of bailout might now be required for those two larger economies. Uncertainty about upcoming elections in Greece, which might lead to the country's rejection of bailout terms and exit from the eurozone, also weighed on sentiment. China announced on Friday that its manufacturing sector had slowed and was barely expanding, but some investors hoped that recent data would encourage the government to undertake stimulus actions to boost the economy.

Volatility likely to continue, but corporate balance sheets are strong

Markets are likely to remain volatile in the face of ongoing uncertainties in developed and emerging markets alike. In the U.S., a contentious and potentially polarizing political environment in the lead-up to the November elections could hinder any substantive efforts to deal with sluggish economic growth and long-term fiscal imbalances. In Europe, the political, social, and economic turmoil roiling the region has only highlighted the stark contrast between the stronger economies of northern Europe and their weaker counterparts in the south. While the current environment is challenging, we do not think the problems are insurmountable. In the U.S., corporate balance sheets are generally healthy and are a source of potential return through growing dividends and share repurchases for companies with excess cash.

U.S. Stocks¹
Index²	Friday's Close	Week's Change	% Change Year-to-Date
DJIA	12118.57	-336.03	-0.81%
S&P 500	1278.04	-39.78	1.63%
NASDAQ Composite	2747.48	-90.05	5.46%
S&P MidCap 400	896.99	-37.09	1.99%
Russell 2000	738.21	-27.85	-0.34%

This chart is for illustrative purposes only and does not represent the performance of any specific security. Past performance cannot guarantee future results.

¹Source of data Reuters, obtained through Yahoo! Finance Closing data as of 4 p.m. ET.

²The Dow Jones Industrial Average and the Standard & Poor's 500 Stock Index of blue chip stocks, the Standard & Poor's MidCap 400 Index, and the Russell 2000 Index are unmanaged indexes representing various segments by market capitalization of the U.S. equity markets. The Nasdaq Composite is an unmanaged index representing the companies traded on the Nasdaq stock market and the National Market System.

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U.S. Bond Market

Week Ended June 1, 2012

Long-term Treasuries lead fixed income markets.

Long-term Treasuries generated the strongest returns this week amid ongoing concerns about the eurozone crisis and lackluster U.S. economic data. The 10-year yield touched a new low of 1.46% on Friday. Investment-grade corporate bonds held up surprisingly well and produced gains with help from the drop in underlying interest rates. High yield bonds also benefited from falling Treasury yields, and the underlying fundamentals of the high yield market remain generally sound as issuing companies focus on deleveraging and improving their balance sheets.

Emerging markets bonds faced selling pressure, with issues denominated in local currencies taking a further hit as investors retreated to the U.S. dollar and Japanese yen, driving the euro to a two-year low against the greenback. Factors influencing the market included a less-than-stellar Italian bond auction, the growing lack of confidence that the Spanish banking sector will be dealt with efficiently, and the overhang of another two weeks of uncertainty in Greece ahead of upcoming elections. The Greek economy continues to deteriorate and will likely do so for the rest of the year. We believe a Greek exit from the euro is likely, though not until sometime in 2013. Spain presents a nearer-term risk as problems continue to mount and could force the country to accept some additional financial assistance.

Weak U.S. employment report could lead to reduced hiring through year-end.

Scarcely a week ago, the U.S. housing sector looked as though it could be bottoming out and entering a new growth phase. Now, a few days later, discouraging news about slowing economic growth in China, ongoing problems in the eurozone, and a weak U.S. jobs report has cast a shadow over the ray of hope shed by the housing sector. The economy added only 69,000 new nonfarm jobs in May, reinforcing the sluggish pace of job growth in March and April, and the nation's unemployment rate rose from 8.1% to 8.2%. With a slowdown in China and ongoing turmoil in the eurozone, companies are likely to take a more cautious approach to hiring in the coming months, according to T. Rowe Price estimates. In addition, other data point to a similar decline in wage and salary income, which could curtail consumer spending as we approach the November elections. The Congressional Budget Office warned that the U.S. could be pushed into a recession if we fail to get our budget in order and spending under control before the end of the year.

U.S. Treasury Yields¹
Maturity	June 1, 2012	May 25, 2012
2-Year	0.25%	0.29%
10-Year	1.46%	1.74%
30-Year	2.52%	2.85%

This table is for illustrative purposes only. Past performance cannot guarantee future results.

¹Source of data: Bloomberg.com, as of 4 p.m. ET Friday, June 1, 2012.

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International Market

Week Ended May 25, 2012

International Stocks

Foreign stock markets closed lower for the week ending May 25, 2012 with the broad international measure, the MSCI EAFE Index (Europe, Australasia, and Far East), losing -0.35%.


Region/Country	Week's Return	% Change Year-to-Date
EAFE	-0.35%	-2.25%
Europe ex-U.K.	-0.25%	-2.84%
Denmark	-1.10%	12.22%
France	-0.22%	-3.84%
Germany	-0.59%	4.22%
Italy	0.68%	-13.25%
Netherlands	-0.51%	-4.56%
Spain	-2.22%	-23.45%
Sweden	3.24%	-0.71%
Switzerland	-0.59%	-0.35%
United Kingdom	0.53%	-1.49%
Japan	-0.92%	-2.92%
AC Far East ex-Japan	-0.37%	1.92%
Hong Kong	-0.54%	3.51%
Korea	1.42%	0.79%
Malaysia	0.52%	1.68%
Singapore	-0.51%	8.45%
Taiwan	-1.37%	1.36%
Thailand	-4.36%	10.52%
EM Latin America	0.19%	-4.12%
Brazil	0.47%	-8.80%
Mexico	0.02%	2.34%
Argentina	3.58%	-40.97%
EM (Emerging Markets)	-0.33%	-0.37%
Hungary	-2.47%	0.56%
India	-0.86%	2.11%
Israel	-3.72%	-4.23%
Russia	-0.34%	-5.03%
Turkey	-3.89%	8.88%

International Bond Markets

International bond markets in developed countries were lower this week, with the J.P. Morgan Global Government Bond Less U.S. Index losing -0.79%.


Region/Country	Week's Return	% Change Year-to-Date
Developed Markets	-0.79%	-0.72%
Europe
Denmark	-0.36%	-1.09%
France	0.50%	1.00%
Germany	-1.10%	-0.27%
Italy	-1.31%	4.90%
Spain	-2.05%	-6.96%
Sweden	0.19%	-2.92%
United Kingdom	-0.60%	2.12%
Japan	-0.88%	-2.37%
Emerging Markets	-0.34%	3.08%
Argentina	-3.03%	-12.42%
Brazil	-0.26%	2.14%
Bulgaria	-0.08%	3.41%
Russia	0.31%	4.33%

International Currency Markets

On the currency front, the U.S. dollar was stronger against the major currencies for the week.


Currency	Close (May 25, 2012)	Week's Return (U.S. $)	% Change Year-to-Date (U.S. $)
Japanese yen	79.600	0.43%	3.34%
Euro	1.2512¹	1.65%	3.62%
British pound	1.5636¹	1.08%	-0.61%

¹U.S. dollars per national currency unit.

Sources: Foreign stock markets and currency sections are from Rimes Technologies, using MSCI data. International bond markets are from J.P. Morgan.

Note: All returns are in U.S. dollars. All bond indices are J.P. Morgan. All stock indices are Morgan Stanley Capital International (MSCI).

Equity Indices
EAFE:	MSCI Europe, Australasia, and Far East Index
Europe Ex-U.K.:	MSCI Europe ex-U.K. Index
Far East Ex-Japan:	MSCI AC Far East ex-Japan Index
Latin America:	MSCI Emerging Markets Latin America Index
Emerging Markets:	MSCI Emerging Markets Index

Bond Indices
Developed Markets:	J.P. Morgan Global Government Bond Less U.S. Index
Emerging Markets:	J.P. Morgan Emerging Markets Bond Index Plus

All charts are for illustrative purposes only and do not represent the performance of any specific security. Past performance cannot guarantee future results.