New Inflation Fears Push Dow Down 24 Points : Markets: Commodity price index hits a 3 1/2-year high, sending bond yields up sharply. The dollar also suffers.
A surprising surge in a leading commodity price index Monday to a 3 1/2-year high ignited an inflation scare that pushed bond yields sharply higher and sparked a big selloff in stocks and the dollar.
The Commodity Research Bureau index of 21 agricultural and industrial commodities rose 4.67 points to 238.36, up 2% from Friday’s close and its highest daily close since October, 1990.
Seventeen commodities in the CRB index registered gains, with soybeans leading the way on fears of a drought-damaged crop. Only orange juice and energy prices were lower in a day of hectic trading.
Soybean futures prices rocketed to a 10-month high Monday on the Chicago Board of Trade as drought fears mounted.
Soybeans for July delivery leaped 29.75 cents to $7.323 a bushel, the highest daily settlement for near-term deliveries since July 19.
The surge ignited a broad rally in commodity prices, which drove up the key market index.
The Federal Reserve Board has raised interest rates four times this year in a bid to stamp out inflation. The latest credit tightening last week--by half a point in two key rates--was viewed favorably by the markets at the time, and both stocks and bonds soared.
But the fear now is that rising commodity prices will filter down through the economy and produce price spirals in other goods, pushing up inflation from its currently benign pace and damaging the economy.
Gold closed at $389.60 an ounce on the Comex, up $3.70, while silver fetched $5.761 an ounce, up 13.1 cents.
The yield on the bellwether 30-year U.S. Treasury bond soared to 7.43% from 7.30% at Friday’s close, while its price, which moves in the opposite direction, fell 1 3/8 points, or $13.75 per $1,000 in face value.
“The CRB (index) is way too strong for the bond market to handle,” said Jay Ferguson, an analyst at Ferguson, Andrews & Associates. “Inflation fears are being stirred once again.”
The rising index also hit the dollar by raising fears of foreign selling of dollar-denominated securities. The dollar slumped against the German mark but fared better against the Japanese yen on reported progress in U.S.-Japan trade negotiations.
Rising U.S. interest rates, which in the past have tended to support the dollar, are now viewed as an indication of rising inflation in U.S. investments.
In late New York trading, the dollar was quoted at 1.643 marks, down from 1.647 on Friday. The greenback fetched 104.36 yen, up from Friday’s 104.05.
Meanwhile, the higher bond rates spooked the stock market, where the Dow Jones average fell 23.94 points to close at 3,742.41. In the broader market, declining issues outnumbered advances by about 4 to 3 on the New York Stock Exchange, where 249.42 million shares changed hands.
From the opening, the broad market took its cue from bonds, heading steadily downward until late in the session, when the Dow average and other stock market indicators recovered slightly. At one point, the blue chip indicator was down about 40 points.
Higher rates make share prices less appealing relative to interest-bearing investments and increase the cost of money to corporations.
Among the market highlights:
- A bright spot on the NYSE was Gerber, which led the most-active list, gaining 15 1/2 to 50 1/8 amid merger news. Sandoz, the Swiss pharmaceutical and chemical conglomerate, said it will buy the U.S. baby food leader for $53 a share, or about $3.7 billion.
- Other food stocks rallied with Gerber. Quaker Oats gained 7/8 to 66, Campbell Soup added 7/8 to 37 5/8 and Hershey Foods rose 7/8 to 42 1/2.
- Among the few Dow components rising on the day, Philip Morris added 1 1/2 to 55 1/4 on further speculation that it will split its food and tobacco operations.
- United Airlines parent UAL Corp. rose 1 3/8 to 120 3/4 after UAL revised terms of an employee stock ownership plan.
- New World Communications rose 1 11/16 to 10 5/8. News Corp.’s Fox is making a $500-million investment in New World.
Meanwhile in overseas markets, Tokyo’s 225-share Nikkei average ended up 226.54 points, or 1.11%, at 20,568.71, while London’s Financial Times 100-share average fell 18.9 points to 3,108.4. The German stock market was closed for a public holiday.
Mexico City’s Bolsa index closed up 14.13 points at 2,431.43.
Market Roundup, D8
FINANCIAL MARKETS / DAILY DIARY
May 23, 1994
Dow Jones Industrials High: 3,770.65 Close: 3,742.41 Low: 3,711.40
New York Volume 249.42 million shares
Interest Rates 30-Year T-Bond: 7.43% 1-year T-Bill: 5.22%
