Greenspan Remarks Snap Bonds’ Rally : Markets: Yields jump as Fed chief’s comments deflate investor hopes that central bank won’t tighten credit again soon.
Federal Reserve Board Chairman Alan Greenspan torpedoed stock and bond markets Wednesday as he warned Congress that more interest rate hikes may be necessary to rein in inflation.
Bond yields, which had fallen Tuesday to their lowest levels in three weeks, leaped again on Greenspan’s comments. The 30-year Treasury bond yield surged to 7.54% from 7.46% on Tuesday.
On Wall Street, stocks closed broadly lower, hurt by Greenspan’s testimony and by more disappointing second-quarter earnings reports from some key companies. The Dow Jones industrial average sank 21.04 points to 3,727.27.
Analysts said the markets’ declines weren’t large but that Greenspan may have done significant damage to fragile investor psychology by continuing to harp on prospects for higher interest rates.
On the New York Stock Exchange, losing stocks outnumbered winners by nearly 2 to 1.
The Fed has raised short-term rates four times this year in an effort to slow the economy and keep inflation down. While Greenspan admitted in his Senate testimony Wednesday that the Fed sees few signs of sharply rising prices for consumer goods and services, he said the central bank remains wary.
“It is an open question whether our actions to date have been sufficient to head off inflationary pressures and thus maintain favorable trends in the economy,” Greenspan said.
In the battered bond market, investors had been pushing yields lower in recent weeks on the expectation that the Fed wouldn’t feel compelled to raise rates again anytime soon. But Greenspan’s comments caused some investors to dump bonds in fear of a potential August rate hike.
“The view is he is coming out slightly more hawkish than he was expected to,” said Dana Johnson, analyst at First Chicago Capital Markets.
Reflecting concern about another rate increase, bond yields rose across the board. The yield on the one-year Treasury bill surged to 5.35% from 5.24% on Tuesday.
The selloff in bonds abruptly reversed one of the biggest rallies since the bond market turned bearish in early February, when the Fed first raised rates.
Meanwhile, the dollar failed to benefit even though Greenspan specifically said he was concerned about the currency’s decline this year. Indeed, many analysts have speculated that the Fed’s next rate hike would be made mostly to support the dollar.
Traders said sliding securities prices and profit taking from the dollar’s recent rally undermined any positive effect on the currency from Greenspan’s comments.
The dollar closed in New York at 98.65 Japanese yen and at 1.565 German marks, down from 99.25 yen and 1.568 marks on Tuesday.
Elsewhere, commodity prices were broadly lower, but that failed to help bonds. Lumber futures plunged on the Chicago Mercantile Exchange after the government reported a surprisingly steep 9.8% drop in June housing starts.
Spruce two-by-fours for September delivery fell below the daily limit of $10, to $367 per 1,000 board feet.
On Wall Street, many stocks were buffeted by interest rate fears and by quarterly earnings reports.
Wednesday “was a shakeout day,” said Don Hays, director of investment strategy at brokerage Wheat First Butcher Singer. “We think people are quick to sell on any news.”
Among the market highlights:
* Technology stocks suffered another selloff, hurt by some disappointing earnings news. Software firm Sybase plunged 8 3/4 to 39 3/4 after analysts noted a slowdown in sales growth in its otherwise stellar earnings report.
Also falling on earnings news was another software firm, Cadence Design. It slumped 3 7/8 to 13 1/2. And Compaq Computer fell 1 3/4 to 31 1/2 even though its earnings met expectations.
* Among other tech issues falling, Microsoft lost 1 3/4 to 48 3/8 in advance of its earnings report, released after the market closed. The firm said quarterly sales were up 24% and that earnings rose 30% before onetime items.
* In the drug sector, Pfizer dropped 2 to 60 1/8 after reporting higher profit, but with the expectation that its 1994 earnings will come in toward the bottom of estimates. Rival Johnson & Johnson rose 1 1/8 to 44 3/4 on its earnings report.
* Among airlines, USAir gained 1/2 to 7 after reporting a rare quarterly profit. AMR, parent of American Airlines, reported a large profit but dropped 1 1/2 to 61 3/8.
* HMO stocks slid on renewed worries about price wars, rekindled by earnings reports from Mid Atlantic Medical Services and California HMO Foundation Health.
Mid Atlantic slumped 6 1/8 to 41 3/4 and Foundation Health tumbled 3 1/2 to 35 1/2. Other losers included PacifiCare A, down 4 to 47 3/4, and United Healthcare, off 1 3/8 to 43 3/4.
* Some bank shares continued to drop, despite this week’s generally strong earnings reports. Wells Fargo fell 5 to 152 1/2, First Interstate sank 2 3/8 to 75 5/8, NationsBank lost 1 3/8 to 53 5/8 and Citicorp was off 3/8 to 40 3/8.
But BankAmerica, which reported results Wednesday, eased just 1/8 to 47 3/8. And Great Western added 1/8 to 19.
* Among stocks responding positively to earnings news was Reebok, up 2 3/4 to 33 7/8.
* Home builders’ stocks dropped on news of the large drop in June housing starts. Kaufman & Broad fell 5/8 to 15, Lennar sank 1 3/8 to 20 1/2 and Centex gave up 5/8 to 24 3/4.
Overseas, London’s FTSE-100 index eased 14.1 points to 3,077.2 while Frankfurt’s DAX average gained 9.86 points to 2,138.65.
Tokyo’s Nikkei average ended up 5.60 points at 20,780.76.
In Mexico City, the Bolsa index tumbled 44.35 points to 2,210.95 on worries about another possible rise in U.S. interest rates.
* GREENSPAN WARNING: The Federal Reserve Board chairman raised the possibility of more interest rate increases. A1
