US jobs growth prompts fears of rate rise

Expectations of a rise in American interest rates this month increased sharply yesterday after figures showing the economy still powering ahead.

Employers in the United States created some 310,000 new jobs last month - well above expectations - and hourly earnings are also rising faster than anticipated.

Although the US labour department warned against "a rush to judgment on signs of inflation", Wall Street was badly rattled by the unexpectedly strong figures. Share prices, bonds and the dollar all fell as a result.

"It's a lock, with a Fed rate hike on August 24 - no ifs, ands or buts about it," said John Lonski, chief economist at Moody's Investor Services in New York.

"The numbers were considerably stronger than people were expecting. Coming on top of the productivity data yesterday which were poor, it's looking very likely now we'll get a rate increase in two weeks' time," said Andrew Davies, bond analyst at Monument Derivatives in London.

The Federal Reserve Board increased US interest rates at the end of June, and has subsequently made it clear that it was prepared to take pre-emptive action if it detected any signs of gathering inflationary pressures.

Analysts believe that the board will find it hard to shrug off yesterday's pay data and believe that it might also be eyeing the oil price, which yester day topped $20 a barrel in London for the first time in almost two years.

The Fed's stance was underlined by comments from William Poole, president of the Federal Reserve Bank of St Louis, who said yesterday that financial markets would be able to predict the US central bank's policy changes if they accepted that "the Fed's primary goal is price stability and its secondary goal is stability of output and employment".

On Wall Street the Dow Jones Industrial Average fell 100 points after the non-farm payroll figures before rallying briefly and falling again; US treasuries declined by a full point. On the foreign exchanges the dollar slipped to 114.5 yen - and was down from $1.0742 to $1.0766 against the euro.

"The markets look more like the Indianapolis speedway than a stock market.

"There's a thrill a minute. The mood changes in milliseconds. We are in a vulnerable and volatile market," said one market strategist.