By Clyde Noel

Last week blue chips were volatile, welcomed the latest gross domestic product data and closed in a positive manner. What’s impressive was the market’s comeback after its earlier loss of 174 points.

Wall Street welcomed the GDP data, which shows the economy is growing at an annualized rate of 3.8 percent in the fourth quarter. The jobs report, scheduled to be released Friday, will be most important because it has the ability to impact rates for weeks to come.

Last week the Dow increased to 10,841.60 and the Nasdaq jumped to 2,065, but the Town Crier index - with a small 48-company base - fell 0.83 percent because local stocks Google and eBay fell to $185.87 and $42.24 respectively.

The economy is growing briskly, and the Federal Reserve Board has been raising short-term interest rates from 1 percent to the current 2.5 percent on fears of inflation, while the long-term bond has actually fallen, which is not textbook procedure.

Interest rates come in short and long varieties, and the Fed controls only the short-term rates. The longer rates are set in the market as investors buy and sell government bonds and mortgages.

The 10-year Treasury note, considered the benchmark for long rates, is currently about 4.3 percent, down from around 4.6 percent last June. This worries economists and bond traders because the yield curve is a gauge of interest rates.

When the gap between short and long rates widens, the yield curve grows steep, and that can be a sign the economy will soon strengthen. However, when the yield curve grows flatter, it can be a sign the economy is running out of gas. If it turns down it could mean a recession is in the future.

Bonds are reaching the floor of resistance, and Friday’s jobs report could be the catalyst. If the number of jobs reported exceeds expectations of 225,000, this will be bad news for bonds and home loan rates, especially in light of recent events where inflation can be on the rise.

Some analysts think we’re seeing the abnormal effect of the giant global trade imbalance. Billions of dollars flow overseas from American consumers’ wallets every day, and then flow back via foreign purchases of American securities.

U.S. businesses, meanwhile, are awash in profits, which means they need to borrow less to finance their own growth. In effect, the supply of money exceeds demand, so interest rates remain low since no one needs to borrow.

That could change if the economy maintains its current growth rate of 3.8 percent. Another few months like this and demand for loans will push up those long interest rates on fears of inflation.