Fed’s Inaction Spooks Stock, Bond Traders : Markets: The Dow plummets 40.46 points as T-bond yields surge again. Electric utility stocks also plunge.
Stock prices tumbled and bond yields surged for a second consecutive session Monday as investors expressed concern over the economy’s healthy pace and questioned the Federal Reserve Board’s commitment to fighting inflation.
The Dow Jones industrials fell 40.46 points to 3,629.04. And electric utility stocks--sensitive to higher interest rates--dropped to their lowest levels since 1989.
In the bond market, the yield on the Treasury’s benchmark 30-year bond zoomed to 7.65% from 7.55% on Friday and is now at its highest level since late 1992. The yield had been 7.33% just last Thursday.
The markets’ latest rout began Friday, after the government reported robust job growth for April. The news reignited the inflation worries that have dogged the bond market all year, with investors focused on the economy’s strength and the potential for rising prices as consumers and businesses spend more.
After Friday’s employment report, bond traders had expected that the Fed would immediately move to again raise short-term interest rates, thereby showing its resolve to moderate the economy’s growth and dampen inflationary pressures.
But the Fed, which has raised short-term rates three times this year, failed to act Friday or Monday. That was a major disappointment to bond investors, who fear that the central bank is moving too slowly to contain inflation.
“This perceived lack of leadership by the Fed has gotten the bond market spooked that (the Fed governors have) lost their resolve to fight inflation,” said Todd Clark, senior trader at Mabon Securities.
“Investors want to see some sign of a Fed backbone,” agreed James Solloway, a director at Argus Research.
While many experts believe it is only a matter of time before the next Fed hike in short-term rates, any delay is debilitating to the frazzled bond market--particularly this week, as the Treasury attempts to sell $17 billion in three-year notes today and $12 billion in 10-year notes Wednesday.
Some economists have criticized the Fed’s policy of “gradualism,” under which it has raised rates a quarter-point at a time.
“By pursuing a gradualist policy, the Fed is allowing itself to be backed into a position of having to make a large rate move to restore confidence and market stability,” said L. Douglas Lee, economist at NatWest Washington Analysis.
Many economists still believe that long-term bond yields will stabilize and perhaps fall back again by summer, if the market can be persuaded that inflation won’t become a major problem. But in the meantime, the continuing rise in yields is eroding the value of existing fixed-rate bonds and bond funds, raising the specter of another selling wave by small investors.
Bond mutual funds suffered a large outflow of money in March during the first major surge in yields. On Monday, traders said some of the selling in the bond market may have been due to bond fund managers raising cash in anticipation of more shareholder redemptions ahead.
In the stock market, traders keyed off the bond market’s weakness, leaving stocks broadly lower. NYSE losers topped winners by 17 to 5, though volume was typically slow for a Monday.
Stocks briefly rebounded before 11:30 a.m. EDT, when the Fed typically acts in the money markets. When the Fed signaled it wouldn’t raise rates short-term rates Monday, the slide resumed.
Though higher short-term rates aren’t necessarily good for the stock market, many stock investors now favor an additional boost in short rates if that would allow the bond market to stabilize.
Also, fear of inflation can be as damaging to stock prices as to bonds--so many on Wall Street favor higher short-term rates to keep the economy’s recovery on an even keel with low inflation.
Among the market highlights:
* Electric utility stocks, which usually suffer as interest rates move up, were crushed by the latest bond yield rise and by news of a dividend cut by FPL Group, parent of Florida Power & Light.
The Dow utility index tumbled 5.47 points, or nearly 3%, to 183.36, its lowest level since March, 1989.
FPL plunged 4 3/8 to 27 1/2 after cutting its dividend 32%, even though the market had expected some kind of cut by FPL as a cash-saving measure. Other utilities dropping sharply included SCEcorp, off 5/8 to 14 3/4; Pacific Gas & Electric, down 1/2 to 23 3/8; Houston Industries, off 1 to 33 3/8, and Consolidated Edison, off 3/4 to 28 7/8.
Also, Pinnacle West Capital, parent of Arizona Public Service, dropped 2 1/2 to 17 7/8 after saying it sees higher costs from closing two of three nuclear generating units at its Palo Verde plant for inspection.
* Tobacco stocks fell on a news story alleging that senior executives at BAT Industries kept secret research done in 1963 on the hazards of smoking. BAT slid 5/8 to 13, Philip Morris sank 2 to 50 and RJR Nabisco lost 3/8 to 5 7/8.
* Industrial stocks were broadly lower as investors feared for the economy’s health amid rising interest rates. GE dropped 1 3/4 to 94 7/8, Caterpillar fell 2 1/2 to 105 5/8, Georgia-Pacific lost 1 to 59 and GM gave up 7/8 to 53 7/8.
* On the upside, some health care stocks were strong. Lilly rose 1 1/8 to 53 1/8, Warner-Lambert gained 1 1/2 to 70 1/2, Pfizer added 1/2 to 59 1/2 and Biogen rose 1/2 to 34 3/4.
In foreign markets, London’s FTSE-100 index fell 8.2 points to 3,097.8 and Frankfurt’s DAX index lost 18.14 points to 2,218.88.
In Mexico City, the Bolsa index fell 29.12 points to 2,147.58.
In Tokyo, the Nikkei index gave up 104.52 points to 19,757.95.
Elsewhere, oil prices inched up while gold gave back $2.20 of the $9.80-per-ounce jump it made Friday, settling at $381.20.
The dollar edged down to 1.653 German marks in New York from 1.660 on Friday, after the Fed failed to boost short-term interest rates. Against the yen, the dollar rose 102.68 from 102.40.
