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The addition of 207,000 jobs to non-farm payrolls in July wreaked havoc on the financial markets on Friday, with sell-offs hitting U.S. Treasury securities and Wall Street as well. The surge in jobs raised concerns about inflation and the possibility of aggressive rate hikes that might be needed to stamp it out. Inflation is the sworn enemy of bonds, as it erodes the value of these fixed-rate assets. Treasury yields, which move in the opposite direction of prices, fell on Wednesday on word that the 30-year bond would be re-issued but selling today sent yields back up to four-month highs. The upward movement of yields, which mortgage lenders use as a guide to set rates, kept upward pressure on both fixed and adjustable-rate products.

The July employment report was not only stronger than consensus forecasts for an increase of 183,000, but the number of new jobs in June was revised upward by 20,000. Another worrisome component to the report showed hourly wages rising 0.4 percent to $16.13 an hour - twice the 0.2 percent that was expected. The increase was the biggest one-month move in a year. The unemployment rate, which is determined by a separate survey, remained at 5.0 percent.

Wall Street Worries

Stocks had another tough day on Friday, with profit takers continuing to sell after a big July run-up. There is also growing concern over the possibility of stronger-than-expected rate hikes, high yields on bonds and the soaring price of oil. Although these factors may have been in play, there are analysts who termed the selling over the last couple of days a market 'correction' that would have come sooner or later.

The Dow Jones Industrials suffered another losing session, but there were only a few components that made big moves in either direction. Merck and Microsoft were the only two stocks of the six that closed positive that gained more than 1 percent. Of the 24 closing in negative territory, GM was hit with a 2.4 percent loss due to possible union problems. Another four Dow members were down by more than 1 percent. One sector that was hit hard due to the upturn in mortgage rates was homebuilders. Many of the big names in that industry closed down today, and the Dow Home Construction Index fell more than 5 percent.

While Nasdaq losses were milder than those of yesterday, the tech-heavy index traded down all session. Microsoft, with a 1.6 percent increase and IBM, with a small gain, were the only tech bellwethers to close in positive territory. Losses, however, have been steeper. Sun Microsystems led with a 2-percent decline, followed by Yahoo! with a 1.6-percent loss and Qualcomm, which shed an even 1 percent. Other losses were modest.

The big news for Nasdaq today was Baidu.com, China's major search engine that is partly owned by Google. In its initial public offering on Nasdaq its stock rose 354 percent. Google, however, lost 1.8 percent.

At closing:

The Dow 30 Industrial Index fell 50.08 points or 0.47 percent to 10,560. 02; the Nasdaq Composite index was down 13.16 points or 0.60 percent at 2,178.16, and the benchmark Standard & Poor's 500 Index matched Thursday's loss, sliding 9.13 points or 0.74 percent to close at 1,226.73.

The 30-year Treasury bond was down 31/32 in price with the yield rising to 4.58 percent versus 4.52 percent at Thursday's close.

The 10-year Treasury note was down 20/32 in price with the yield rising to 4.39 percent versus 4.31 percent at Thursday's close.

The 5-year Treasury note was down 12/32 in price with the yield rising to 4.23 percent versus 4.14 percent at Thursday's close.

AVERAGE mortgage rates (zero discount points) based on rates collected nationwide were:

The 30-year Conventional Fixed-Rate Mortgage was at 5.699 percent from 5.673 percent at Thursday's close.

The 15-year Conventional Fixed-Rate Mortgage was at 5.28 percent from 5.241 percent at Thursday's close.

Coming Up

Economic reports are slim next week until Thursday and Friday when July Retail Sales, the June trade deficit, and a sentiment survey are due. The early week news revolves around Tuesday's Fed decision on interest rates, which are expected to rise another 25 basis points. But investors will focus on the statement, looking for clues of further intentions. There are no reports due on Monday, which will keep Treasuries feeling the pressure of the July Employment Report. Over the weekend and into Monday rates could edge up on some mortgage products as lenders try to keep pace with the escalation in Treasury yields.

Carolyn Siegel

carolyn@interest.com

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