FINANCIAL MARKETS : Good Jobs News Puts Wall Street in Gloomy Mood : Markets: Bond yields rise, while stock prices and the dollar weaken. Fears of a hike in interest rates are back.
News that the economy added more than a quarter of a million jobs last month triggered a sharp rise in Treasury bond yields Friday.
The gloomy mood in bonds spread to other financial markets, weakening stock prices and the dollar. Behind the selloff were renewed fears that the Federal Reserve Board will act to contain inflation arising from the employment strength by pushing up interest rates as early as Aug. 16.
The key 30-year bond yield jumped to 7.54% from 7.40% on Thursday. Its price, which moves in the opposite direction, plummeted 1 13/32 points, or $14.06 per $1,000 in face value.
On Wall Street, the Dow Jones industrial average slid 18.77 points to 3,747.02, down 17.48 for the week.
The markets reacted swiftly to the Labor Department’s morning report that the economy created 259,000 new jobs in July, about 60,000 more than consensus forecasts and besting even the highest expectations.
The long bond’s yield immediately surged, reflecting a swift reversal in sentiment from recent hopes that economic growth had slowed markedly in the second half of 1994.
The bond market’s shortest-term maturities suffered even sharper setbacks, with yields on six-month and one-year Treasury bills jumping about a fifth of a percentage point.
Equally disturbing was a closely watched wage gauge in the report, the hourly earnings of non-farm, non-supervisory workers, which jumped 0.4% to $11.12 in July.
The markets have been concerned that higher labor costs could prove inflationary.
Analysts said the report increases the likelihood that the Fed will raise interest rates as much as 0.5% at its next Federal Open Market Committee meeting in an attempt to slow economic growth and head off any increase in inflation.
Bond rates move in anticipation of such hikes because of the need to offer competitive returns to investors.
“Certainly it’s strong enough to make the Fed seriously consider it, coupled with other things,” said Bill Newman, chief investment strategist at Kidder Peabody.
Back on Wall Street, market declines were widespread. Declining issues outnumbered advancers by nearly 12 to 7 on the New York Stock Exchange, and broad market indexes fell.
The NYSE’s composite index fell 0.77 point to 252.50. The Nasdaq index of mostly smaller companies declined 1.51 points to 718.67. The Standard & Poor’s 500 list fell 1.31 points to 457.09.
Big Board volume was a moderate 230.27 million shares, down from 289.15 million Thursday.
Utility stocks, which had rallied over the past several weeks, were hit particularly hard amid fear that rising interest rates would prove expensive to utilities, which typically borrow heavily in the credit markets. The Dow Jones utility average lost 1.91 points to close at 189.43.
Investors sold the issues of economically sensitive companies, such as smokestack industrial stocks, and interest-sensitive companies, such as banks and mortgage-related companies, on the fear that higher interest rates will choke off investment.
Among the market highlights:
* Caterpillar fell 2 7/8 to 104 3/4, even after shareholders approved a 2-for-1 stock split effective Tuesday. International Paper declined 1/2 to 74 3/8. Morgan Stanley lost 1 3/8 to 62 5/8.
* Telecommunications equipment company Scientific-Atlanta surged 4 3/4 to 39 after its quarterly earnings soundly beat analysts’ forecasts.
* Nextel Communications jumped 1 1/8 to 26 3/4 in Nasdaq trading on news that it reached a merger deal with Dial Page Inc. and was buying Motorola Inc.'s remaining U.S. specialized mobile radio licenses.
* Dial Page slipped 1 3/8 to 30 5/8 and Motorola finished up 1/8 to 52 5/8. The news boosted other wireless communications stocks, including OneComm, which rose 1 5/8 to 26 7/8.
* Fund American Enterprises Holdings climbed 3 7/8 to 74 7/8 after it said it received an unsolicited bid for its Source One Mortgage Service Corp. subsidiary.
Elsewhere, in the currency market, the dollar followed bond prices lower.
A rate hike could benefit the dollar by attracting short-term deposits from Europe, where rates are higher, but those positive implications were offset by the selloff in U.S. securities markets, which dampened demand for dollars.
In late New York trading, the dollar fell to 1.581 German marks, down from 1.588 on Thursday. It also fell against the Japanese yen, closing at 100.25 yen, down from 100.38. Overseas markets were mixed, and the Dow Jones world stock index was lower near the close.
In Mexico City, stocks rose to their highest level in six months amid growing optimism that the economy is healthier than people thought, traders said. The Bolsa index rose for a sixth session, up 2.72%, or 70.06 points, to 2643.87.
Equities also ended firmer in London, with the Financial Times 100-share average rising 17.0 points to 3,167.5, while Frankfurt’s 30-share DAX average closed up 1.40 points at 2,184.76. Tokyo’s 225-share Nikkei average ended down 155.14 points at 20,521.70.