FINANCIAL MARKETS : Dow Listless; Treasury Bill Yields Rise
Short-term market interest rates moved up Monday, awaiting today’s Federal Reserve Board meeting, while stocks finished mixed in slow trading.
The Dow industrial average closed lower in a mild late selloff, losing 8.42 points to 3,760.29.
In the broad market, winners and losers were nearly even on the New York Stock Exchange. The market’s strength continued to be in smaller stocks: The Nasdaq composite index added 1.28 points to 732.89.
While stock trading has been listless on Mondays all summer long, traders noted that investors had good reason to stay away on this Monday, in advance of the Fed’s meeting. The central bank is widely expected to raise short-term interest rates for a fifth time this year, in an effort to slow the economy and retrain inflation.
Treasury bill yields, which had drifted lower last week, jumped again Monday, anticipating Fed action. At the Treasury’s weekly auction, the three-month T-bill yield hit 4.71%, up from 4.54% last week and the highest since November, 1991.
But longer-term yields were mostly steady. The 30-year T-bond yield closed unchanged from Friday at 7.50%.
Most economists believe the Fed will decide to push up its target for the federal funds rate--what banks charge each other on overnight loans--by half a percentage point, to 4.75%.
If the Fed needed another sign that the economy is healthy enough to stand a rate increase, it got it Monday: A monthly survey on output at the nation’s factories, mines and utilities showed a 0.2% advance in production in July, slightly higher than expected.
That report sparked a brief selloff in bonds early in the day, but the selling receded later on.
Many economists say long-term bond yields could hold steady or perhaps decline in the months ahead, even as short-term interest rates rise. The reason is that long-term yields key off expectations for growth and for inflation. If the Fed succeeds in slowing the economy, bond investors should in theory be willing to accept lower yields.
But that argument had also been made earlier this year when the Fed first began to tighten credit, and the surprise was that long-term yields moved up sharply with short-term yields.
As for the stock market, traders say the market’s relative strength in recent weeks suggests that investors are beginning to lose their skittishness over higher short-term interest rates.
“Traders are pretty much assuming the Fed will raise rates half a point, and they hope that’s the end of it,” said Len Hefter, managing director of Nasdaq trading at Jefferies & Co. in Dallas.
Among Monday’s market highlights:
* Drug stocks continued to benefit from takeover rumors and from growing belief that the national health care reform effort is stumbling on Capitol Hill.
Johnson & Johnson gained 7/8 to 49 1/2, a new 1994 high. Also, Merck rose 7/8 to 33 1/8, Schering-Plough jumped 1 to 70, Warner-Lambert added 5/8 to 78 1/4 and Biogen was up 1 1/2 to 47 1/4.
* Among smaller biotech shares, Gensia rose 2 3/4 to 12 1/4 after two analysts issued “buy” recommendations on the stock, citing completion of clinical trials for the firm’s drug to treat heart attacks.
* Some food stocks advanced again, helped by takeover talk. CPC International rose 1 5/8 to 53 1/2, Archer-Daniels gained 3/4 to 25 5/8 and Hershey was up 1 1/4 to 46.
* Many financial stocks rose, despite the specter of another Fed rate increase. Great Western Financial gained 5/8 to 20 3/4, Ahmanson added 1/4 to 22 1/8, FirstFed Financial rose 5/8 to 16 1/4, Morgan Stanley gained 1 to 65 1/4 and Federal Home Loan Mortgage jumped 1 1/8 to 61 3/8.
* Technology stocks were mixed. Hewlett-Packard dropped 2 1/8 to 79 1/8 in profit taking, but Lotus Development surged 2 1/2 to 44 1/2 after a Dean Witter analyst made bullish comments about a new low-cost version of the company’s popular Notes software program.
* Among industrial issues, Varity tumbled 1 3/8 to 33 1/2. Volkswagen said it decided not to award a $135-million contract to Varity for anti-lock braking systems.
In foreign markets, London’s FTSE-100 stock index eased 0.1 point to 3,142.2, while Frankfurt’s DAX index gained 14.16 points to 2,138.84.
In Tokyo, the Nikkei-225 index lost 37.50 points to 20,626.33.
In Mexico City, the Bolsa index rallied on, adding 13.74 points to close at 2,651.50.
In commodities trading, coffee prices rose anew on a U.S. Agriculture Department report of sizable frost damage to Brazil’s key coffee crop. The government estimated 30% to 40% of Brazil’s 1995-96 crop was lost to twin frosts in June and July, worse than analysts had expected.
December coffee futures soared 13.60 cents to $1.98 a pound, the first substantial turnaround in the market since prices peaked in mid-July at $2.45.