By Rick Glaze

The S&P 500 and the Nasdaq indexes both retreated 0.2 percent last week, while the small company index, the S&P 600, edged up 0.6 percent posting its third weekly gain. The U.S. economy added 78,000 new jobs but the increase was below analysts’ forecasts, causing the markets to retreat. Internet, computer and some retail stocks were weak while energy, metal, investment banks and HMO issues held firm. The slow down in job growth is a symptom of a sporadic economic picture, one that is partly the result of short-term interest rates inching higher. The Federal Reserve has raised the short-term rate a quarter point eight times in an effort to mitigate any future inflation. When the cost of bank borrowing increases, business expansion slows and inflation pressures dwindle. Inflation is a hidden tax affecting all businesses and consumers, but the consequences are more pronounced on lower income families with less discretionary income. Generally when the cost of things we buy goes up faster than the wages we receive, we tend to buy less and the economy slows. World markets can influence inflation also. When world markets are open and a free flow of trade is robust, cost pressures are low.

After almost all the experts assured us for more than a year that medium and long-term bond yields would be substantially higher, the 10-year Treasury bond yield is below 4 percent, lower than a year ago. Why did they all get it wrong?

The economy is in a substantial recovery and when short-term rates rise, long term rates often follow. But with low inflation, open world markets and weak growth in Europe, the long-term rates have not followed.

French voters rejected the European Union’s new Constitution last week. This is a setback for the unification movement. The Dutch and the French both seem to dislike the document but for different reasons. The Dutch are for free trade and see too much protectionism and the French are isolationists and see too much free trade.