Bond prices soar on weak employment report

Wall Street plunged while bonds surged higher after the gov't reported payrolls in August fell for the first time in four years rather than rising as had been expected.

By AP
September 9, 2007 08:10
4 minute read.
Bond prices soar on weak employment report

wall street traders 88. (photo credit: )

Wall Street plunged while bonds surged higher Friday after the government reported payrolls in August fell for the first time in four years rather than rising as had been expected. The Dow Jones industrial average fell nearly 250 points. Investors were taken aback by the Labor Department's report that payrolls dropped by 4,000 in August, the first decline since August 2003. Economists had forecast payrolls would increase by 110,000. However, the unemployment rate held steady at 4.6 percent as expected. Wall Street had been awaiting the report all week as it sought to determine how well the economy was holding up under the weight of a faltering housing market, a rise in mortgage defaults and tightening availability of credit. While the report is backward looking, investors regard it as an important proxy of the economy's overall health. "This certainly cements the case for a Fed action at the next meeting. The debate has really become about whether it will be 25 or 50 basis points," said Zach Pandl, economist at Lehman Brothers Holdings Inc., referring to whether the central bank would reduce rates by a quarter point or a half percentage point. He expects the Fed will reduce rates by 25 basis points to 5% when it meets September 18. The Dow fell 249.97, or 1.87%, to 13,113.38. Broader stock indicators also skidded. The Standard & Poor's 500 index fell 25.00, or 1.69%, to 1,453.55, and the Nasdaq composite index fell 48.62, or 1.86%, to 2,565.70. The three major indexes, though still in positive territory for the year, all finished the week down more than 1%. Bonds, meanwhile, soared following the jobs report as investors sought safety. The yield on the benchmark 10-year Treasury note, which moves inversely to its price, skidded to 4.37% from 4.51% late Thursday. The dollar fell sharply following the report, as the likelihood of an interest rate cut appeared to increase. Dollar-based assets would earn less interest if the Fed were to cut rates. In addition, gold prices rose sharply because some investors would be expected to abandon a weakening dollar and move into gold if the central bank lowers rates. EUROPE European stocks fell sharply Friday after a US jobs report triggered concern that the euro zone's biggest trading partner could face a recession. Banks, automakers and miners led the declines. The UK's FTSE 100 Index slumped 1.9% to 6,191.20, while France's CAC-40 Index fell 2.6% to 5,430.10. Germany's DAX Index lost 2.4% to 7,436.63. Banks, perceived to be most exposed to the situation, have taken the brunt of the fallout in Europe and were weaker again on Friday. Other companies highly sensitive to the health of the U.S. economy also lost ground. ASIA China's main index dipped 2.2% after rising to a record high the day before. Shares in Indonesia, Singapore and Sydney were higher. Japanese stocks fell in thin trading as many investors chose to pare back positions ahead of the US jobs data. The benchmark Nikkei 225 index dipped 134.84 points, or 0.83%, to 16,122.16 points. On Thursday, the index gained 0.6%. Steel stocks were among the weakest performers, with Nippon Steel Corp. falling 3.07%. Banking shares also fell as prospects for interest rate hikes in Japan recede amid weakening economic conditions. CURRENCY The dollar plunged against the yen Friday and dropped sharply against the euro and the British pound. The dollar dropped to 113.34 Japanese yen from 115.29 yen late Thursday. The euro rose to $1.3768 in late New York trading from $1.3687, while the British pound rose to $2.0279 from $2.0231 late Thursday. Friday's evidence of a slowing economy pushed currency investors to shy away from the yen-carry trade, a riskier investment strategy that involves selling off the low-yielding yen in favor of higher-yielding dollar-denominated assets. Instead, wary currency traders sold off dollars and bought back yen. In other New York trading, the dollar bought 1.1879 Swiss francs, down from 1.2015 late Thursday, and 1.0554 Canadian dollars, up from 1.0528. COMMODITIES Gold prices advanced Friday as investors sought a haven from sinking stock prices, a falling US dollar and heightened world political risks. Investors have been wary of any sign that the housing slump or tighter credit conditions would spread and spoil growth in the broader economy, and the poor jobs data was "one signal that definitely contradicted the containment scenario," said Jon Nadler, senior analyst with Kitco Bullion Dealers. The Fed meets September 18 to discuss the direction of its federal funds rate, which banks charge each other on overnight loans. As the US dollar deflated, December gold gained $5.10 to settle $709.70 an ounce on the New York Mercantile Exchange, after earlier rising as high as $716.60. Silver prices, which often tail gold, jumped 22.7 cents to close at $12.76 an ounce. Elsewhere, energy futures climbed on the Nymex, reversing early losses, as concerns about squeezed supplies of oil and gasoline outweighed investor worries about a possible economic slowdown. Light, sweet crude for October delivery gained 40 cents to settle at $76.70 a barrel a barrel on the Nymex. October gasoline futures 1.47 cents to settle at $1.9864 a gallon. In Chicago, wheat futures continued their march higher after slipping back earlier in the session, while corn and soybean prices also rose. Wheat prices have piled on a hefty 68 cents, or 9%, in a week on the back of global supply concerns and continued robust demand for the grain.


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