FINANCIAL MARKETS : Goods Report Hurts Stocks and Bonds
An unexpected surge in orders for durable goods sparked investors’ inflation fears, driving interest rates sharply higher and stock prices down.
The Commerce Department reported that orders to factories for long-lasting big-ticket items such as cars and appliances jumped 1.3% in June. Durable goods orders are a key barometer of manufacturing industry plans, because increased orders often lead to more production and jobs.
The broad-based nature of the surge, which was more than twice market expectations, drove investors’ fears of inflationary growth.
In the bond market, the yield on the Treasury’s key 30-year bond shot up to 7.61% from 7.54% Tuesday. Its price, which moves in the opposite direction, dropped 21/32 point, or $6.56 per $1,000 in face value.
On Wall Street, the Dow Jones industrial average fell 15.21 points to 3,720.47 on a Big Board volume of 251.76 million shares, up from 231.14 million on Tuesday. The broader market was also lower. Declining issues outnumbered advancers by about 13 to 9 on the New York Stock Exchange. Treasury bond prices were hammered from the outset by troubles in the European bond market, particularly sharp losses in British trading because of technical influences. European financial markets open before New York trading begins.
“It wasn’t just planes and defense. There was actually some general strength in the report,” said Kevin Flanagan, money market economist at Dean Witter, Discover & Co. in New York.
Rising inflation could give the Federal Reserve more reason to raise short-term interest rates again. Higher rates tend to curb inflation, but they also diminish the value of existing bonds, which pay a fixed rate of return.
But the negative factors may have helped bolster demand later in the day when the government auctioned five-year notes, some analysts said, by lowering prices and thus attracting more investors to the new securities.
The Treasury sold $11 billion in the intermediate notes in the second of two note auctions this week.
Reflecting the decent response, the bid-to-cover ratio--a measure of auction demand comparing the number of bids offered to those accepted--was 2.56 to 1. That was only slightly lower than the 2.70-to-1 average of previous five-year note auctions.
The mildly positive auction results, however, failed to spill over into secondary trading, where the new securities are bought and sold.
Higher bond yield rates make stocks less appealing relative to interest-bearing investments, and borrowing more expensive.
The stock market spent the day broadly lower, although the relatively light volume lessened the significance of the decline, analysts said.
Even stronger-than-expected earnings reports from Ford Motor Co., Walt Disney, DuPont and Minnesota Mining & Manufacturing inspired little enthusiasm. Ford finished with a loss of 1 to 30 3/8, and DuPont slipped 3/8 to 59 7/8; the others ended only slightly higher.
Bill Allyn, managing director at Jefferies & Co, said the lethargic trading indicated investors were reluctant to make significant new commitments in stocks without more information about the direction of interest rates.
Among other major market indicators, the Standard & Poor’s list of 500 stocks fell 0.79 point to 452.57, and the NYSE composite index fell 0.40 point to 249.84. The Nasdaq composite index of mostly smaller issues, meanwhile, dropped 3.53 points to 712.13. At the American Stock Exchange, the market value index fell 0.48 point to 434.02.
Share prices also fell abroad. Equities finished sharply lower in Tokyo on selling of export-oriented high-tech shares and arbitrage-linked selling led by weakening futures prices. The Nikkei 225-share average closed down 208.14 points at 20,137.23.
In London, the Financial Times 100-share average tumbled 34 points to close at 3,082.3. Frankfurt’s DAX 30-share average ended at 2,140.44, down 11.52 points. Stocks also closed sharply lower in Paris, Zurich and Hong Kong.
In Mexico City, however, the Bolsa index soared 39.82 points to close at 2433.22, its highest level in almost seven weeks.
Among the market highlights:
* Dow component Bethlehem Steel lost 1 5/8 to 20 3/4 after reporting earnings that fell short of Wall Street expectations.
* Wm. Wrigley Jr. shed 4 1/8 to 44 on disappointing quarterly earnings.
* Signet Banking gained 1 3/4 to 39 1/4 after the company said it filed an application with the Securities and Exchange Commission to spin off 19.9% of its credit card unit in an initial public offering.
* Biogen rocketed 15 1/4 to 44 3/4 on news of promising results in a trial of its drug for treating multiple sclerosis.
* Chiron, though, fell 5 1/8 to 52 5/8 after Wertheim downgraded the stock, citing a potential change in dynamics in the market for multiple sclerosis treatments.
Elsewhere, the dollar was mixed, strengthening slightly against the Japanese yen but falling against the German mark.
An influential U.S. economist and adviser to the Clinton Administration said trade sanctions against Japan were unlikely, contributing to the dollar’s rise against the yen.
But lower bond prices, hurt by strong durable goods orders that aroused inflation fears, drove the dollar lower against the mark.
In New York, the dollar rose to 98.55 Japanese yen, up from 98.28 on Tuesday. The dollar fell to 1.574 German marks from 1.584 marks.
