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A weaker-than-expected employment report wasn't weak enough to spur buying in U.S. Treasury securities. And a drop in the unemployment rate to a four-year low eventually led to selling. In addition, Wall Street rallied on the employment data, recent upbeat corporate news and strong retail sales. Each of the three major indexes gained more than 1.0 percent, drawing funds out of bonds and into equities. Prices of Treasuries tumbled, sending yields, which move in the opposite direction of prices, up. Yields on the benchmark 10-year note and the five-year note have risen 17 basis points each since June 30, and this climb has forced mortgage lenders who base their rates on yields, to increase rates on most mortgage products.

The employment numbers in June showed 146,000 jobs added to non-farm payrolls - less than expected but enough to keep the Fed raising interest rates at a 'measured' pace. This disappointed bond traders looking for low numbers that would slow or halt the rate hikes. In addition, the headline unemployment number, which is based on a separate survey, showed unemployment hitting 5.0 percent for the first time since September 2001. May employment numbers were revised up to 104,000 from 74,000, adding to concerns. Hourly wages rose by an expected 0.02 percent, which was low enough to be 'non-inflationary.'

The release of Wholesale Inventories for May was lost in the shuffle, but they did increase 0.1 percent. This was below forecasts for a 0.4 percent increase, and far below the revised 0.7 percent gain in April.

Wall Street Stages Big-Time Rally

An employment report that market-watchers termed 'just right,' and bullish earnings from Alcoa that beat both earnings and revenue estimates ignited a rally in the equity markets that kept on escalating. The three major indexes ended at their best levels of the session, with the Dow Jones Industrials posting their highest close since June 21. Also boosting stocks was the fact that the price of oil fell below $60 a barrel in spite of concerns about Hurricane Dennis and the potential damage it could do to oil production in the Gulf of Mexico. In fact Exxon was one of only two Dow Jones components to close in negative territory, along with Boeing. Losses, however, were minimal.

The Dow Jones was led by Alcoa, which kicked off the second-quarter earnings season by gaining 4.5 percent. Merck added 3.4 percent and a handful of technology components - including IBM, Intel and Microsoft, also put up big numbers. In all, nine components gained more than 2-percent each and another dozen rose more than 1 percent.

The Nasdaq composite was the big winner of the day, closing up 1.8 percent. Strong gains by big-cap techs kept the index climbing from open to close. Qualcomm led the tech bellwethers with a 3.8-percent increase, followed by Intel, which added 2.7 percent and IBM and Cisco Systems, which gained 2.5 percent each. Ericsson was up 2.3 percent and Microsoft helped out by adding 1.7 percent. Yahoo! and JDS Uniphase were the only ones to close in negative territory, but their losses were small.

At closing: The Dow 30 Industrial Index rose 146.85 points or 1.43 percent to 10,449.14; the Nasdaq Composite index was up 37.22 points or 1.79 percent at 2,112.88, and the benchmark Standard & Poor's 500 Index gained 13.99 points or 1.17 percent to close at 1,211.86.

The 30-year Treasury bond fell 12/32 in price with the yield rising to 4.34 percent from 4.30 percent at Thursday's closing.

The 10-year Treasury note was down 7/32 in price with the yield rising to 4.09 percent from 4.05 percent at Thursday's close.

The 5-year Treasury note was down 6/32 in price with the yield up to 3.87 percent versus 3.83 percent at Wednesday's closing

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

The 30-year Conventional Fixed-Rate Mortgage was at 5.441 percent from 5.421 percent at Thursday's close.

The 15-year Conventional Fixed-Rate Mortgage was at 5.018 percent from 5.018 percent at Thursday's close.

Coming Up

There are several market-moving economic reports slated for release during the week of July 11, but the first ones are not due until Wednesday. This will leave the financial markets searching for direction until then. They may not have to look far, however, as stocks might have gathered enough momentum to rally into the beginning of next week. On the other hand, U.S. Treasuries could continue to dwell on good employment numbers and low unemployment, which would keep them under pressure. Over the weekend and into Monday mortgage rates could edge up due to the increase in yields that resulted from Friday's sell-off.

Carolyn Siegel

carolyn@interest.com

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