The S&P 500 has dipped below the 1,000 level today as all three major indexes have shed more than 1% in the first three hours of trading. A better than expected productivity report did little to boost spirits before the open, and markets extended their losses 30 minutes into the session when it was reported that wholesale inventories were reduced quite a bit more than had been forecasted. Aside from reacting to data, markets are anxious as the Federal Reserve's monetary policy board begins its two-day meeting today.

At 12:30, the S&P 500 is trading 1.21% lower at 995, while the Dow has shed 0.95% to 9,248, and the Nasdaq is down 1.19% to 1,968. All three indexes saw moderate losses yesterday as well, but those two days of losses follow a four-week rally.

The first piece of news this morning was the 8:30 data explaining how second quarter earnings performed so well. The Labor Department said business productivity rose by 6.4% between April and June ― its most rapid rate in six years ― while labor costs were slashed 5.8%, the largest cut in nine years, owing to mass layoffs and little pressure on wages.

“The combined efforts of workers and business to grind out solid productivity gains through the recession is unequivocally good news - an underlying reality of solid fundamentals that has been overlooked by the economic doomsayers and naysayers for many months,” said Brian Bethune, chief US financial economist at IHS Global Insight.

Bethune said productivity gains should create a basis for businesses to create new jobs, while benign inflation should allow the Federal Reserve to maintain low interest rates in the medium-term.

“The fact that American workers are capable of generating these amazing productivity gains ultimately is good news for employment – as the economy moves from recovery in the second half of 2009 and the first half of 2010, to potential expansion in the second half of 2010 and beyond,” he added. “There is no doubt that businesses will have a strong desire to add more of these high quality workers into their teams.”

Futures initially moved higher on the news before the bell, but in the early minutes of the session all three indexes were back in the red. 

At 10 am, losses were extended as the Commerce Department reported that wholesale inventories were cut by 1.7% in June, almost twice as bad as forecasts. The decline marks the 10th straight month of losses, a new record. 

Looking at the larger picture, investor sentiment is optimistic that the recession is coming to an end, but that has already been priced in: the benchmark S&P 500 has gained close to 50% since early March.

The rest of the week brings plenty of data that should confirm recovery is on the horizon, but for now attention will be on tomorrow's 2:15 statement from the FOMC. The Fed is widely expected to maintain the status quo, but talk of increased regulation or inadequate comments on an exit strategy could cause markets to continue the sell-off.