After the Labor Department reported a 0.1 per cent drop in the jobless rate to 5.2 per cent in March, the post-Easter week was ending in the same nervous mood it had begun for the financial markets, amid gyrating prices and debate over whether the 8 per cent decline in the Dow since its peak last month was a correction, or a signal that a bear market had begun.
After an initial plunge of 70 points the Dow briefly struggled back into positive territory, before lurching back to a loss of over 20 points by mid-session. In the bond market, the benchmark 30-year treasury bond moved lower, losing 21/32 points after two hours of trading. Its yield, which moves in the opposite direction, was up from 7.07 to 7.12 per cent.
For analysts the unemployment figures sent two contrasting messages. The overall drop was exactly as expected and the number of new non-farm jobs created, at 175,000, actually lower than predicted. But in a market searching for bad news, the focus was on a 5 cent rise in hourly earnings, after an identical rise in February.
Thus far a 4 per cent rise in wages over the last 12 months has translated into growth of 3 per cent or less in consumer prices. But the Fed is known to follow developments in hourly earnings when setting its interest rate policy, and a second consecutive small rise in short-term rates is reckoned at least an even-money bet when the Fed's Open Market Committee next meets on 20 May.
"It's not a frightening report," Robert Dederick of the Northern Trust Company in Chicago said yesterday, "but it's not a relaxing one. It keeps us very much on our guard, and points to another Fed tightening in May." Adding to market nervousness, the Fed's vice-chairman, Alice Rivlin, said this week that the economy continued to grow strongly in the first quarter, after the revised 3.8 per cent GDP growth in the final quarter of 1996.
This is well above the 2.5 per cent expansion the Fed traditionally believes is the maximum that can be achieved without rekindling inflation - though yesterday the House Speaker, Newt Gingrich,declared that Congress would seek a target annual growth of 4 or 5 per cent from the Fed's chairman, Alan Greenspan.
The March jobless rate was the lowest for five months.Reuse content