Strong U.S. jobs data boosts stocks, dollar

LONDON (Reuters) - Stocks and the dollar rallied on Friday, while government bonds and interest rate futures tumbled after higher-than-expected U.S. jobs data eased concerns about the impact of the credit squeeze on the economy and profits.

The world's biggest economy added a solid 110,000 new jobs in September and hiring in each of the two previous months was revised higher.

Wall Street was set for a firmer open while investors pared expectations that the Federal Reserve would cut interest rates in October following market upheavals which started in August with a crisis in risky U.S. mortgages.

Shock weakness in August's non-farm payrolls data, which showed the first monthly drop in hiring in four years, served as a key trigger for the Federal Reserve's 50 basis point rate cut to 4.75 percent two weeks ago. The drop was on Friday revised to a rise.

"Happy days are here again," said Mark Vitner, economist at Wachovia Securities in Charlotte, North Carolina.

"It shows that the downside risks to the economy had been grossly overstated, that the economy is nowhere near recession."

The FTSEurofirst 300 index was up 0.7 percent on the day, while the MSCI main world equity index was up on the day, inching towards the record high earlier this week.

Stocks were already rallying this week as disclosure by big banks of their credit-related losses helped investors to shift their focus back on strong economic fundamentals.

Barclays (BARC.L) rose 0.6 percent after the bank withdrew an offer for ABN AMRO AAH.AS.

U.S. stock futures were up around 0.6 percent SPc1, indicating a firmer start on Wall Street.

"Anyone worried about a recession, they just have to go back to the drawing board because once again the numbers tell them that the economy is still growing moderately," said Stuart Hoffman, chief economist at PNC Financial Services Group in Pittsburgh.

The dollar index .DXY, a gauge of the greenback's value against a basket of major currencies, rallied after the jobs data, edging away from an all-time low hit earlier this week.

The Canadian dollar strengthened to as high as C$0.9843 against the U.S. dollar CAD= before trimming gains as data showed the Canadian jobless rate hit its lowest since 1974.

CAUTIOUS MONEY MARKETS

In the money market, three-month euro interbank lending rates fell to 4.76438 percent at their daily fixing LIBOR, down from this week's six-year high but still stood more than 70 bps above the European Central Bank's benchmark rate. Rates for three-month sterling and overnight dollar also fell.

Analysts caution however that money markets are not sharing the optimism in equity markets and tensions linger as demand for cash remains at elevated levels.

"The liquidity crisis is not over... The money market's malfunctioning remains a liquidity issue which should persist into the year-end," BNP Paribas said in a note to clients.

The iTraxx Crossover index, the most widely watched indicator for European credit market sentiment, tightened, while emerging sovereign spreads narrowed by 9 basis points.

The December Bund future was down 44 bps, while the benchmark 10-year U.S. Treasury note fell for a yield of 4.61 percent.

London Brent crude fell 0.5 percent, moving away from September's record high. Gold steadied at $730.80 an ounce, just off this week's 28-year high.

Strength in oil and other commodity prices has underpinned sentiment for emerging markets.