Rates and Inflation Keep Wall St. on a Short Leash

Whew!

Wall Street can breathe easier this week on an easing of worries about inflation.

Friday's job report showed little upward pressure on wages. So - for now - inflation remains under control.

And that prospect kicked Wall Street into gear, bringing a 56-point gain in the Dow industrials for the day, and 123 points (1.79 percent) for the week.

"Everyone had been expecting a 'bad report' on employment - that is, that the jobless rate would go down sharply," says Hildegard Zagorski, a market analyst at Prudential Securities Inc.

Clear sailing

"It looks like clear sailing for the market now for the next few days," at least until this Friday's report on wholesale inflation, Ms. Zagorski says. "But it doesn't look like the report will show much new inflation."

Stock traders worry about a boost in short-term interest rates, as a preemptive strike against inflation, when Fed policymakers meet March 25.

Fed chairman Alan Greenspan has alternatively suggested rates might go up or sideways.

His latest tea leaves were floated Wednesday, when he suggested to Congress that the economy is on course, with no visible inflation concerns.

Friday's jobs report eased inflation worries further. Wage increases were muted, and there was a drop in the number of people leaving jobs voluntarily - a trend Mr. Greenspan watches for signals of wage inflation.

The "quit rate" fell to 10.9 percent of newly unemployed Americans in February, from 12.3 percent in January.

But Greenspan has also warned Congress that the Fed may raise interest rates even before inflation appears in statistics. The Fed meets March 25 to decide.

After that, the Fed's Open Market Committee doesn't have a scheduled meeting until May.

The winners

The main beneficiaries of last week's market upswing were blue-chip stocks, Zagorski says. Sears, DuPont, and Philip Morris all showed well.

Technology stocks have turned from market leaders to market stragglers, in part reflecting the drag the high dollar puts on US exports. Intel, Microsoft, and Cisco all took price hits last week.

While both the Dow and the Standard & Poor's 500 are up more than 8 percent for the year, the technology-laden Nasdaq has struggled to a 1.6 percent gain.

Still, the Wall Street consensus remains upbeat: The Dow should hit 7300 this spring, predicts Rao Chalasani, chief market strategist at Everen Securities Inc. in Chicago.

There are potential hurdles, however, says Greg Nie, another Everen analyst.

Trading activity has fallen sharply in recent weeks, suggesting many investors are moving to the sidelines, says Nie.

Volatility is up, indicating skittishness. Moreover, new questions about White House fund-raising could send stocks southward, Nie adds.

Political uncertainty often breeds market uncertainty.