The US economy is going from strength to strength, according to employment data released yesterday. Non-farm payrolls leapt by 404,000 in November, the biggest one-month increase since February 1996, and almost double the number markets had anticipated.
The unexpectedly strong figures put traders on red alert in the early afternoon. The Dow was expected to plunge by 100 points at market opening, 2.30pm GMT. Nervous UK dealers began selling off shares prior to Wall Street's opening, sending the FTSE tumbling from 5,148.7 just before midday to 5,047.9 at 1.45pm.
But US dealers held their nerve, and shares in New York remained firm on speculation that the employment data would not persuade the US Federal Reserve to raise interest rates.
The strong US stock market prompted a rebound in the FTSE in late afternoon trade. The FTSE closed at 5142.9, 60.6 up on the day.
The US payrolls rise brought November's unemployment rate down by 0.1 per cent to 4.6 per cent, the lowest since October 1973. Experts had expected unemployment to rise to 4.8 percent,
Market jitters are likely to continue until the Fed decides US interest rates later this month. But many US dealers are expecting rates to remain on hold, at least for the time being. There is still evidence of deflation in US manufacturing, and increases in productivity are helping rein in US labour costs. Investors switching funds out of the bond market also helped push US equities higher yesterday, dealers said.
US interest rate watchers will be watching US retail sales data and producer price data, both scheduled for release next week,
``With calm markets elsewhere, [US] retail sales will be quite important in bringing back some focus to domestic markets and possibly some fear there may be a Fed move the following week," said Andrew Snowball, economist at Julius Baer Investments in London.
Figures out on Thursday are forecast to show US retail sales up 0.3 per cent in November after a fall of 0.2 percent in October. US producer price index data are scheduled for release on Friday.
UK economists will be keeping their eyes on UK retail prices data, due to be published on Tuesday. NatWest Markets are forecasting no change, leaving inflation running 3.7 per cent higher than at this time last year. "Prices in the high street should be held back by the strength of the pound and this should outweigh the negatives to leave inflation unchanged on all measures," said NatWest.
UK producer prices are scheduled for release on Monday. NatWest is forecasting a further wave of input price deflation. It said: "This should feed through to lower output price inflation, especially as UK manufacturers are feeling less bullish about prices and output."