Dow dives 160 points as US retail figures soar

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The Dow Jones Industrial Average, in its fifth steepest fall, plunged 160 points yesterday after figures showing US shoppers set a cracking pace for retail sales in the first two months of 1997. Treasury bonds were also sharply lower because of fears that US interest rates will rise later this month.

The Dow Jones index fell below the 7,000 barrier, to close 160.5 points down at 6878.9.

Retail sales rose by 0.8 per cent last month, while January's increase was revised to 1.5 per cent, more than twice the first estimate. "If we continue like this from February, we will see the best sustained retail spending in about 10 years," said Jonathan Basile, an analyst at HSBC Markets in New York.

Separate figures showed a decline in new unemployment claims last week, with a drop of 5,000 taking the average for the past four weeks to its lowest since 1989.

As always, analysts hold mixed views about whether or not the Federal Reserve will raise interest rates at the next meeting of its Open Markets Committee on 25 March. But the balance of evidence has tipped towards expecting a quarter-point increase.

Yesterday's retail sales figures followed further evidence last week that the American economy is creating jobs at an extraordinary pace. The non-farm payrolls total jumped by 339,000 in February.

The Federal Reserve's "Beige Book", the regional survey of the economy which provides the basis for Fed interest rate decisions, contained evidence on Wednesday of future inflation pressures. Even though it was upbeat about the short- term inflation outlook, most regions reported that businesses found it difficult to recruit new staff.

Recent Congressional testimony by Fed chairman Alan Greenspan started to prepare the financial markets for what would be the first increase in official interest rates since February 1995. Mr Greenspan warned that asset prices were sending inflation danger signals.