Bank stocks soared as interest rates plunged Friday in reaction to news of slower job growth, a sign the economy is slowing and the Federal Reserve may not need to douse inflation.
After correcting for the effects of the United Parcel Service strike, the Labor Department said only 53,000 jobs were created in September, and the unemployment rate held steady at 4.9%
The report surprised business economists, who expected post-strike payroll growth over 250,000 and had predicted the jobless rate would fall. Meanwhile, hourly earnings increased only modestly, and the average workweek declined slightly.
The data "provided financial markets with everything they could have hoped for," said Bruce Steinberg, chief economist at Merrill Lynch & Co. Notably, hourly wages were up just 0.3%, despite a minimum wage increase.
The reading also bolsters the Fed's decision last week not to raise rates, and appears to make central bank action on monetary policy less likely for the rest of the year.
"We expect the Fed to remain on hold well into 1998," said Mr. Steinberg, adding that bond yields "may fall through 6% even sooner than we have been forecasting."
Rates tumbled dramatically Friday. As bond prices rose, the yield on the Treasury's benchmark 30-year "long" bond plummeted to a new low for the year of 6.16% in morning trading. The previous low point this year was 6.30% on July 31.
Shares of banks and stocks generally jumped sharply on the news, then pulled back to more moderate gains. The Dow Jones industrial average soared over 100 points in morning action, topping the 8,100 mark for the first time since mid-August.
An exception to the bank stock rally was CCB Financial Corp., Durham, N.C., whose shares slipped in value following recent sharp gains attributed to takeover speculation.
As for rates, some observers said the long bond may quickly head toward the 6.05% yield level if further evidence confirms the slower pace of the economy. Beyond that, the bond could move below 6% to yields last seen in late 1995.
In another sign of falling rates, some on Wall Street noted that the yield on the Treasury's two-year note, which was 5.61% Friday morning, is approaching parity with the 5.5% federal funds rate set by the central bank.
If the two-year yield moves lower, and particularly if it drops under the funds rate, investors would begin expecting the Fed to lower rates. But market players said that would require significant further proof the economy's slower pace is not a momentary pause.
However, the job market report is not the only sign of slackening in business conditions. The purchasing managers index for September declined to 54.2, from 56.8 in August, weaker than expectations.
Norbert Ore of the National Association of Purchasing Managers, which maintains the index, said manufacturing-related growth apparently peaked in July. The index reading may mean fourth-quarter business activity will be lower.