Inflation News Rattles Markets : Wall Street: The consumer price index rose 0.4% in April, double what analysts expected; stocks and bonds suffer.
Inflation fears sent financial markets on a rampage Thursday, pummeling bonds and stocks and turning gold into everybody’s favored investment.
The dollar marched to its own drum, rising on renewed turmoil among European currencies.
Analysts said the markets were unnerved by the Labor Department’s report that the consumer price index had risen 0.4% in April, about double the increase that analysts had expected and the largest increase in three months.
The inflation-sensitive yield on the Treasury’s 30-year bond shot up to 6.95% from Wednesday’s 6.85%. Its price, which moves in the opposite direction, went into near free fall, closing down 1 1/4, or $12.50 per $1,000 in face value, to 102 1/8.
It was the long bond’s highest yield since it hit 6.96% on April 6 and represents the top end of the trading range that has confined bond trading in recent months.
The report came a day after the government announced that wholesale prices had risen a surprisingly steep 0.6% in April, the biggest increase in 2 1/2 years.
The news fed worries that accelerating inflation would erode the value of fixed-income securities such as bonds. It also made it seem less likely that the Federal Reserve will be lowering interest rates anytime soon, and lower rates would tend to boost the value of bonds.
“The two inflation numbers in the last couple of days really pushed us over the edge,” said Frank Marchetti, a bond trader at Fuji Securities Inc. “It was a mess today.”
As prices fell and yields rose, the Treasury was forced to pay more to sell 30-year bonds at its afternoon auction, the final leg of this week’s three-part quarterly refunding.
The Treasury sold $8.26 billion in bonds at an average yield of 6.97%, down from 7.22% at the last auction on Feb. 11.
The bid-to-cover ratio, representing the number of bids offered compared to those accepted, was 2.37 to 1, compared to an average of 2.30 to 1 in Treasury auctions since 1987.
Thursday’s results, while about average, were not as bad as many traders had feared.
The federal funds rate, the interest on overnight loans between banks, fell to 3% from 3.25% late Wednesday.
Commodities
Gold soared more than $12 an ounce in European trading after the release of the report on wholesale prices.
Gold often takes on more luster for investors as a hedge against inflation, but analysts said the market has also been feeding on the general renewal of interest in precious metals.
Gold also spurted in New York trading. On the Commodity Exchange in New York, gold for current delivery rose $7.50 an ounce to $368.70. Silver for current delivery jumped 8.9 cents an ounce to $4.460.
The precious metals price has been depressed for more than a year, and the last time prices reached Thursday’s highs was in mid-November, 1991, said Martin Reichenberg, manager of trading services for Pegasus Econometric Group in Hoboken, N.J.
“It’s all lending to this euphoria--or close to it--that gold is going to go back to $400 an ounce,” Reichenberg said.
The big rise in gold prices began Wednesday after a U.S. Labor Department report that wholesale prices rose 0.6% in April, the largest increase since a 1.0% gain in October, 1990.
Thursday’s inflation report exacerbated inflation fears.
Meanwhile, oil futures slipped below the $20-a-barrel threshold on the New York Mercantile Exchange for the first time in months. Light, sweet crude oil for June delivery fell 42 cents to $19.78 a barrel.
Other Markets
Stocks opened lower after the release of the consumer price report.
The Dow Jones average plummeted 34.32 to 3,447.99 on Big Board revenue of 299.92 million shares, up from 255.68 million the day before. Declining issues outnumbered advancers by nearly 12 to 5 on the New York Stock Exchange.
In overseas trading, Frankfurt’s DAX-30 share average ended 10.33 higher at 1,639.79. Tokyo stocks ended mixed, with the 225-share Nikkei average losing 82.42 points to close at 20,532.78. London’s Financial Times 100-share average lost 11.5 points to close at 2,849.3.
* The spike in gold prices sent gold stocks higher, creating the only bright spot in an otherwise bleak market. Homestake Mining rose 3/8 to 17 7/8, Battle Mountain added 1/4 to 8 3/8, American Barrick rose 1/2 to 23 1/8, Pegasus Gold added 1 1/4 to 22 1/4, Echo Bay Mines rose 5/8 to 11 1/8, and Hemlo Gold gained 3/4 to 10.
* Away from gold stocks, the market came under severe selling pressure. Financial and utility stocks fell sharply in the wake of higher interest rates. J.P. Morgan slid 1 7/8 to 66 3/8. The Dow utility index fell 1.83% to 235.60. Consolidated Edison declined 1 3/8 to 33 7/8.
* Industrial stocks lost ground, with General Motors off 1 at 40 1/4 and Goodyear down 7/8 at 39 1/4.
* Consumer stocks fell as well. Pepsico dropped 1 1/4 to 36. Procter & Gamble lost 7/8 to 48 7/8. However, Philip Morris rose 5/8 to 50 5/8 after Merrill Lynch upgraded the stock.
* Royal Dutch Petroleum led the most-actives on the NYSE and rose 2 1/8 to 93 1/8. The company is the Dutch arm of Royal Dutch Shell Group, which reported that its first-quarter net profit rose 23%.
In currency trading, the dollar edged higher, strengthened by a shake-up in the European monetary system.
Investors began buying more dollars after European finance officials devalued the Spanish peseta and Portuguese escudo about midday in New York. The devaluations raised questions about the stability of European currencies and drew investors to the safety of the U.S. currency.
The inflation jitters that rippled through financial markets also benefited the dollar. Higher inflation makes it less likely that the Federal Reserve will be lowering interest rates anytime soon, and lower rates would tend to make dollar-denominated investments less attractive.
The greenback settled in New York at 1.615 marks, up from Wednesday’s 1.610 marks. The dollar was quoted at 111.80 Japanese yen, up from late Wednesday’s 111.55 yen.
Market Roundup, D6
* GOOD AND BAD: Retail sales and consumer prices both jumped in April. A1
