Dow bounces back on rates relief

Signs that the American economy may be cooling without the need for further increases in the cost of borrowing prompted a buying spree on Wall Street yesterday.

The Dow Jones index rose by more than 200 points after government figures showed that the economy created fewer jobs than had been expected last month while wage growth slowed. The rally helped the Dow recover more than half of the losses it made during last week.

The labour department figures showed that American employers added 124,000 workers to their payrolls last month, a lower figure than analysts had been predicting. Wage growth was lower as well, with hourly pay rising by just 0.2% - half the rate the market had forecast.

The news prompted a rebound in the dollar against the world's leading currencies. Both the yen and the euro fell against the greenback for the first time in a week. The dollar rose to 110.17 yen from 109.87 before the report, and to $1.0608 per euro from $1.0680.

Sterling was also a victim of the market's new-found enthusiasm for the US currency and of new data which raised expectations that the Bank of England might keep interest rates on hold next week. The pound fell to $1.6053 from $1.6109.

Last month's solar eclipse appears to have put the brakes on the pace of expansion in the UK's services sector, according research from the Chartered Institute of Purchasing and Supply.

"At least part of the dip in activity growth can be accounted for by the 'eclipse effect' that led to unusually high levels of leave during the middle of the month," the institute said.

An AFX news poll showed a majority of city economists expect the Bank of England's monetary policy committee to leave rates at 5%.

"Inflation pressures are subdued in the near term," said Mark Miller, UK economist at Morgan Stanley Dean Witter.

Although output growth has slowed in the sector it remains robust compared to the levels a year ago. The CIPS activity indicator stood at 57.3 last month, compared to a reading of 54.3 in August 1998. Readings above 50 indicate that the sector is expanding.

Although businesses are facing cost pressures they have yet to pass on the increases to consumers. The price of fuel and raw materials is accelerating, but the indicator for the prices companies which charge their customers stood at 49.5, indicating that output prices are falling.