The latest evidence that the US economy is building up a strong head of steam boosted President Bill Clinton's re-election campaign, but in the financial markets it raised the spectre of inflation. It means the Federal Reserve is almost certain to increase interest rates before the summer is out - some economists reckon before the next scheduled policy meeting on 20 August.
The White House wasted no time in making political hay, seizing on the news as evidence that its economic policies were working. In a hastily arranged appearance before television cameras, President Bill Clinton hailed the falling unemployment figures.
"We have the most solid American economy in a generation. And it's good news when Americans can have high job growth, strong investment and low inflation," he declared.
The Dow Jones share price index, more than 117 points lower at lunchtime, closed 115 down at 5,588.14. Bond yields shot up to 7.19 per cent, their highest level for more than a year. The shock came only two days after the Fed's policy-making Open Market Committee opted to leave US interest rates unchanged.
The upset sent shares in London lower too, with the The FT-SE 100 index closing more than 17 points lower at 3,743.2.
"This has spooked the markets," said Brian Fabbri at the investment bank Paribas in New York, speaking above the uproar on the trading floor.
David Shulman, chief economist at Salomon Brothers, was among those forecasting a significant correction in share prices. "Stocks are going to go down. My guess is that a 5 per cent dip is coming out of this right now," he said.
In his statement, President Clinton looking to his race for re-election against Republican candidate Bob Dole, sought to extract the greatest political advantage from the data. Claiming that his administration had created 10 million new American jobs, he said: "We promised to take these economic challenges head-on. Our critics said it wouldn't work. Today's news once again proved them wrong."
Many traders may have been in lazy mood after the Independence Day holiday on Thursday, when the American markets were closed. They were jolted awake, however, when the industrial average lost 86 points in the first 30 minutes of yesterday's half-day trading, triggering the New York Stock Exchange's curbs on automatic trading.
Some on Wall Street cautioned against overreaction, however. Maria Fiorini Ramirez, president of the investment firm of the same name, said: "I think the economy is in a better balance than the market is pricing itself to."
The culprit behind the nosedive in US shares was a far bigger-than-expected increase in employment - the third such surprise this year. The number of people employed on non-farm payrolls rose by 239,000 to 119.5 million, and April's and May's increases were revised up.
Manufacturing employment was down 7,000 during the month, but surged by 233,000 in services. The growth in jobs took the unemployment rate down to 5.3 per cent, lowest since June 1990. "Unemployment could drop to 5 per cent by the end of the year," J P Morgan said.
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