FINANCIAL MARKETS : New Inflation Fears Jolt Investors
Renewed inflation fears and a weakened dollar sent bond yields soaring and stock prices lower Thursday.
The yield on the Treasury’s bellwether long bond rose to 7.48% from 7.40% on Wednesday. Its price, which moves in the opposite direction, dropped 1 1/32 point, or $10.31 per $1,000 in face value.
Triggering the rise in long-term interest rates and the stock markets selloff was a Philadelphia Federal Reserve Bank report on regional manufacturing conditions that resurrected worries of inflationary growth.
But particularly troubling to the financial markets was a sharp jump in the Philadelphia Fed’s prices-paid index, from 26.4 in July to 48.4 this month. That was the highest reading in more than five years. Analysts said that figure, taken with other indicators in the report, could signal that prices are rising despite slow growth.
The Philadelphia survey stoked fears that the Federal Reserve’s 0.5% increase in short-term interest rates last Tuesday will not be enough to curb inflation. Some analysts concluded that the central bank will have to tighten credit again, possibly as soon as its September Open Market Committee meeting.
While the regional Fed survey covers eastern Pennsylvania, southern New Jersey and Delaware, many economists consider it a harbinger of broader economic conditions.
Mead Briggs, head of risk trading at Deutsche Bank Government Securities, said the report was a catalyst for Wall Street traders to sell stocks and bonds purchased two days earlier, following the Fed’s rate hike.
With investors afraid of inflation eroding the value of fixed-income securities, the traders shed hopes that new buyers would emerge to snap up the bonds they bought at prices heightened in Tuesday’s rally.
“A lot of active professional traders bought up the market, anticipating that small investors would buy because there would be no Fed action for three months. But they got a party all together and nobody came,” Briggs said.
Prices of short-term Treasury securities fell from 3/32 point to 5/32 point and intermediate maturities fell from 9/32 point to 19/32 point, the Telerate Inc. financial information service reported.
In addition, foreign investors were discouraged by a plunge in the dollar against the Japanese yen, which reduced the value of dollar-denominated investments such as U.S. government bonds.
In New York, the dollar plunged nearly 2 Japanese yen to 98.58 from 100.18 late Wednesday. It was the dollar’s lowest rate against the yen since July 27.
The dollar also slipped against the German mark, closing at 1.543 marks, down from 1.552.
On Wall Street, the Dow Jones industrial average fell 21.05 points to 3,755.43 on Big Board volume of 293.67 million shares, down from Wednesday’s 312.84 million. In the broader market, declining issues outnumbered advancers by nearly 13 to 9 on the New York Stock Exchange.
Among the market highlights:
* The expectation of higher interest rates sent economically sensitive stocks lower, particularly issues of the Big Three auto makers. Ford fell 1 1/8 to 29 1/2, Chrysler slid 1 1/8 to 47 1/4 and General Motors lost 1 1/8 to 49 7/8.
* Mining stocks rose as gold surged. Echo Bay rose 1/8 to 11 1/8, and Pegasus Gold advanced 3/4 to 14 7/8.
Technology issues held firm for most of the day after IBM rose sharply, but gave up steam near the close. The Nasdaq composite, which is heavily weighted in technology issues, ended 0.49 points lower at 742.17.
* IBM rose 1 3/8 to 66 1/4. Merrill Lynch analyst Daniel Mandresh raised his estimate of IBM’s 1994 earnings from $4 a share to between $4 and $4.50 and left and “above average buy” recommendation on the stock.
* But computer stocks ended mixed. Digital rose 5/8 to 21 3/4, and Hewlett-Packard advanced 1/4 to 87 3/8. But Microsoft, which was up as much as 3/8 earlier in the day, finished 3/8 weaker at 55 1/2. Apple fell 1/4 to 34 3/4, Cisco Systems was down 1/2 at 23 1/2, and Dell Computer was down 1 1/8 at 34 3/8.
Meanwhile, overseas markets were mixed. Tokyo stocks advanced, with the 225-share Nikkei average up 38.21 points at 20,862.77. Frankfurt’s 30-share DAX average closed down 8.73 points at 2,153.56 and London’s Financial Times 100-share average dropped 7.7 points, closing at 3,182.6. Mexico City’s Bolsa index closed down 1.41 points at 2,698.24.
