Markets on both sides of the Atlantic warmed to unexpectedly benign US inflation figures yesterday, with both the FT-SE100 and Dow Jones indexes regaining recent lost ground.
Prices paid to farmers, factories and other producers fell for the first time in eight months in February as fuel and food costs declined, Labor Department figures showed. The overall producer prices index fell an unexpected 0.2 per cent last month while the core rate, which excludes often volatile food and energy costs, rose 0.1 per cent.
"Inflation is hard to find," said Robert Dederick, an enonomist at Northern Trust in Chicago. "You'll have to send a search party."
That was good news for both shares and bonds. In the US, the benchmark 30-year government bond climbed about a quarter point, pushing the yield down two basis points to 6.66 per cent. The Dow added more than 40 points to reach its highest intra-day level since last Friday's 171-point plunge on higher than expected payroll numbers.
In London, the FT-SE 100 index closed 41.5 points higher at 3681.8. Peter Cogliatti, a trader at Williams de Broe, said: "The market's looking good, we've regained our composure. It's going to be a little choppy for a while, but the fears of a major crash seem to be receding by the day."
Greg Nie, market analyst for Everen Securities in Chicago, said: "The producer price report is a plus for bonds, because if inflation can stay restrained, it gives bonds room for a recovery." US stocks, which have moved in parallel with bonds this week, also rose because of rising optimism that the economy is growing with little inflation and that earnings will match expectations this year. The dollar was also higher.
Separately, the Labor Department confirmed last week's job creation news with figures showing that fewer American workers applied for state benefits last week, with total new claims falling to their lowest level in eight weeks. First-time jobless claims declined by a larger than expected 10,000 to a seasonally adjusted 353,000.
Yesterday's report was the first assessment of US labour markets since the government said last Friday that the economy had added 705,000 jobs in February, the largest monthly gain in more than 12 years.
Analysts said the producer prices figures suggested investors over-reacted by pushing bond yields higher last week. Attention will focus today on consumer price and industrial production data to see if US interest rates have any further to fall.
The Fed lowered the key overnight lending rate in three steps from 6 per cent to 5.25 per cent between July 1995 and January following seven increases aimed at cooling consumer spending.