Inflation’s Specter Dampens Stocks, Boosts Gold : Markets: August consumer price figures raise fears of a renewed upward spiral. The cost of living rose across the board.
The cost of living took a surprising jump in August, the government reported Tuesday, giving rise to fears of inflation that drove interest rates and gold prices sharply higher as it dragged down the stock market.
The Labor Department said consumer prices rose 0.3% last month, after an increase of 0.1% in July. Prices of food, clothing and housing all advanced in August.
With volatile food and energy prices excluded, the so-called core inflation rate also rose 0.3% last month, after a 0.1% rise in July.
“The basic message is that inflation lives,” said Robert Dederick, chief economist for Minneapolis-based Northern Trust Co. “The notion that it was dying was exaggerated.”
The new figures shocked complacent investors and led to severe losses in the bond market, where the 30-year Treasury bond reversed two weeks of record-setting gains. Its yield jumped to 5.97% from 5.88% Monday.
Bonds dislike inflation, which erodes the value of such fixed-income securities. Stocks have taken their cue from bonds recently because the low interest rates that accompany higher bond prices make stocks more appealing.
The Dow Jones industrial average fell 18.45 points on Tuesday, to close at 3,615.76. Declining issues outnumbered advancing ones 1,330 to 676 on the New York Stock Exchange, where volume was moderately active at 258 million shares. The NASDAQ index of over-the-counter stocks also weakened, falling 7.68 points to 732.64 on the back of a decline in technology shares.
Gold, still viewed as an inflation hedge, rose on the inflation news. On New York’s Commodity Exchange, gold bullion for the most active December contract rose $2.10 an ounce, to $346.90 an ounce. Gold had dropped to five-month lows as inflation fears began to dissipate amid a slew of flat economic data.
Hopes that inflation was about to disappear were raised last week by news that producer prices had taken a steep 0.6% drop in August--but all of that decline was due to an astounding 25.6% fall in tobacco prices as cigarette makers slugged it out for sales in a shrinking market.
“We’ve got a three-three economy--3% growth and 3% inflation,” Dederick said.
A separate report, showing surprisingly strong retail sales last month, also hurt bonds, and stocks followed. The Commerce Department said retail sales rose 0.2% in August. It was the latest of a five-month string of increases and better than the flat sales many analysts had expected. Bond investors also dislike hints of stronger than expected growth, because they raise the specter of inflation.
“Stocks followed bonds. That’s really all it was today,” said Bill Allyn, a managing director at Jefferies & Co.
Analysts said the inflation report gave the stock market a chance to extend its recent consolidation.
“You’ve had a two-month, 200-Dow-point rally,” said Alfred Goldman, head of market analysis at A. E. Edwards. “The market got ahead of itself. Bonds got ahead of themselves. It’s a normal siesta , to work off some of the froth.”
But some traders dismissed the worry about renewed inflation. “I think the bond market will forget about this inflation thing in about two days,” one said.
Dale Tills at Charles Schwab said the stock market has yet to see a major consolidation.
“It’s not bad,” he said. “I just think the CPI got people worried, and they’re taking some profits. It’s nothing more than that.”
Among the market highlights:
* Banking shares slumped amid the rise in interest rates. Dow component J. P. Morgan sank 1 1/2 to 75 7/8; Bankers Trust was down 2 1/2 to 80.
* Airline stocks fell after several carriers announced another round of fare cuts Monday, and as AMR and UAL, parents of American and United Airlines, announced layoffs and asset sales amid continuing losses.
UAL lost 4 1/4 at 142 1/4; AMR closed 3/8 lower at 64 3/8; Delta Air Lines fell 1 5/8 to 52 5/8; USAir Group declined 1/4 to 13 7/8; Southwest Airlines dropped 7/8 to 31 7/8.
* Home Depot slumped 4 1/8, to a 52-week low of 36 1/8, after Goldman Sachs removed the home improvement stores chain from its “recommended” list--citing, among other things, mounting competition.
* Crown Cork & Seal rose 1/4 to 34 3/4. Goldman added it to its “buy” list.
* Among technology stocks, Intel shed 1 1/2 to 63 1/4; Microsoft fell 1 1/8 to 75 1/4; Apple Computer lost 1 to 24 1/4.
Compaq Computer, which tumbled 4 1/8 on Monday, rose 3 to 56 1/4, but Motorola fell 1 1/2 to 90 3/8.
* Viacom closed off 2 5/8 at 61 1/2 on news that its chairman, Sumner Redstone, bought Viacom class B shares between July 5 and Aug. 20. The firm had bid to acquire Paramount Communications.
Stocks ended mostly higher abroad. In Tokyo, the 225-issue Nikkei average fell 0.9%. In London, the Financial Times 100-share index rose 0.1%. Frankfurt’s DAX index rose 0.4%.
The dollar fell against most other major currencies after the report of higher-than-expected inflation in the U.S. economy.
The yen surged in a broad rally sparked by sales of Australian dollars, Brazilian debt restructuring and a widening Japanese trade surplus.
The dollar jumped briefly in a knee-jerk reaction to the price news. Inflation boosts the dollar if it nudges interest rates higher, since that increases yields on dollar-denominated investments.
But a selloff quickly ensued when dealers recalled a long string of U.S. economic data pointing to a slow recovery.
“The data was a little stronger than the awful figures expected. When you get down to it, the recovery is moribund,” said one American bank dealer in London.
Vague talk that European central banks were buying German marks to replenish intervention reserves also depressed the dollar.
The dollar fell to 1.6090 marks in late New York trading from 1.6110 at Monday’s close.
The dollar steadied at 105.85 yen in late New York trading, down from 106.23 yen Monday, as dealers awaited Japan’s economic stimulus package, due Thursday. It is expected to include measures aimed at reducing Japan’s trade surplus.
Oil prices closed mixed ahead of the weekly inventory report from the American Petroleum Institute trade group.
October crude rose 1 cent to $16.96 a barrel.