Blue-chip measure at six-year high after weaker April jobs report raises bets that the Fed can pause its rate-hiking campaign.

May 5, 2006: 12:13 PM EDT


NEW YORK (CNNMoney.com) - The Dow Jones industrial average surged to its highest level in more than six years Friday as a weaker-than-expected April jobs report fanned hopes that the Federal Reserve's interest-rate-hiking campaign can soon end.

The Dow Jones industrial average (up 109.26 to 11,548.12, Charts) added 1 percent nearly 2-1/2 two hours into the session, adding to six-year highs hit Thursday and moving within 200 points of its all-time high of 11,722.98 hit on Jan. 14, 2000.

The broader Standard & Poor's 500 (up 10.11 to 1,322.36, Charts) index added 0.8 percent and the Nasdaq composite (up 15.20 to 2,339.10, Charts) added 0.7 percent.

The bond market had a similarly positive response. Treasury prices rallied, lowering the yield on the benchmark 10-year note down to 5.10 percent from 5.15 percent late Thursday, near a four-year high.

Employers added a smaller-than-expected 138,000 jobs to their payrolls in April, versus Wall Street economists' forecasts for 200,000 new jobs to be added. In addition, the March number was revised down to 200,000 from an original reading of 211,000.

The unemployment rate, generated by a separate survey, held steady at 4.7 percent in the month.

The slowdown in the labor market was received positively by the stock market, with investors betting that it means that the Federal Reserve can pause in its rate-hiking campaign following next week's policy meeting.

The central bank is widely expected to boost the Fed funds rate, a key overnight lending rate, by a quarter-percentage point to 5 percent at its meeting next week. That would mark the 16th consecutive rate hike since the central bank began its rate-hiking campaign in June 2004.

However, Fed Chair Ben Bernanke has hinted that the Fed may pause soon, and futures contracts on the Chicago Board of Trade suggest traders think the Fed will stop as soon as June.

"What the report does is give the Fed some breathing room," said Stephen Stanley, chief economist at RBS Greenwich Capital. "People were beginning to worry that they would pause at the June meeting and that the economy would keep going strong, which would be bad for stocks."

He said the April payrolls report is making investors happy in that it is giving the impression that the Fed's forecast is correct - namely, that the economy is slowing down, therefore necessitating a pause.

However, Stanley cautioned that the payrolls number is notoriously volatile, that the labor market is stronger than the report would suggest, and that he doesn't think the economy is cooling as much as the Fed has suggested, despite the impact of the slowdown in housing. He says the risk that the Fed will pause, but then resume its rate hikes hasn't moderated despite Friday's report.

What's moving?
Stock gains were broad based, with 28 out of 30 Dow issues rising.

Gainers included economically sensitive shares such as Alcoa (up $0.62 to $35.10, Research), Caterpillar (up $1.68 to $80.49, Research), General Motors (up $0.46 to $23.04, Research) and Home Depot (up $0.98 to $41.24, Research).

Microsoft (up $0.37 to $23.81, Research) and the Dow's other tech components gained too, as did financial components such as JP Morgan Chase (up $0.58 to $46.27, Research).

The Amex Securities Broker/Dealer (up 5.13 to 233.22, Charts) index surged 2.3 percent.

Oil stocks also jumped back after the previous day's selloff, boosting the Philadelphia Oil Service (up 4.51 to 233.45, Charts) sector index by nearly 2 percent.

Activision (up $1.46 to $14.55, Research) shares jumped 11 percent in unusually active Nasdaq trade after the video game software publisher reported a narrower-than-expected quarterly loss and sales that beat forecasts.

Market breadth was positive. On the New York Stock Exchange, winners beat losers three to one on volume of 720 million shares. On the Nasdaq, advancers topped decliners eight to five on volume of 905 million shares.

Crude oil for June delivery rose 36 cents to $70.30 a barrel on the New York Mercantile Exchange. Oil tumbled more than 6 percent in the last two sessions in response to a government report showing a surprise rise in oil and gas supplies.

COMEX gold for June delivery gained $4.50 to $681 an ounce.