FINANCIAL MARKETS : New Inflation Fears Jolt Investors
Renewed inflation fears and a weak dollar sent bond yields up and stock prices lower Thursday.
The yield on the Treasury’s bellwether 30-year bond jumped to 7.48% from 7.40% on Wednesday. The yield had plunged as low as 7.36% on Tuesday, after the Federal Reserve Board raised short-term interest rates in an attempt to slow the economy.
Following bond prices, the Dow industrial average slid 21.05 points to 3,755.43 on Thursday.
Triggering the day’s rebound in long-term interest rates, and the stock market’s selloff, was a Philadelphia Federal Reserve Bank report on regional manufacturing conditions that resurrected worries of inflationary growth.
Particularly troubling in the report was a sharp jump in what Philadelphia-area manufacturers said they paid for commodities and other raw materials. The latest survey showed prices paid were at a five-year high, the Fed said.
Analysts said that figure, taken with other indicators in the report, could signal that the economy remains strong enough to fuel inflation.
The Philadelphia survey stoked fears that the Fed’s latest half-point hike in short-term interest rates won’t be enough to curb inflation. Some analysts concluded that the central bank will have to tighten credit again, possibly as soon as its September meeting.
The regional Fed survey covers eastern Pennsylvania, southern New Jersey and Delaware, but 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.
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With investors afraid of inflation eroding the value of fixed-income securities, traders shed hopes that new buyers would emerge to snap up the bonds they bought Tuesday.
“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.
In addition, foreign investors were discouraged Thursday by a renewed plunge in the dollar against the Japanese yen. A falling dollar reduces the value of dollar-denominated investments such as U.S. government bonds held by foreigners.
The dollar appeared to be responding to news that Japan’s trade surplus with the United States surged in June.
In New York, the dollar plunged nearly 2 Japanese yen to 98.58, from 100.18 on 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, most stock indexes closed modestly lower. In the broad market, declining issues outnumbered advancers by nearly 13 to 9 on the Big Board.
Among the market highlights:
* The expectation of still-higher interest rates sent economically sensitive stocks lower. Among 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.
Other losers included Boeing, down 1 to 45 1/8; Caterpillar, down 1 7/8 to 107 7/8, and Hercules, off 2 5/8 to 101 3/8.
* On the upside, gold-mining stocks gained as the metal’s price rose, helped by inflation jitters. American Barrick gained 1/2 to 22 1/4, Echo Bay rose 1/8 to 11 1/8 and Pegasus Gold advanced 3/4 to 14 7/8.
* Technology issues were mixed, as IBM jumped 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 $4.25 and retained his “above average buy” recommendation on IBM.
Among other tech issues, Digital Equipment rose 5/8 to 21 3/4 and Hewlett-Packard advanced 1/4 to 87 3/8. But Apple fell 1/4 to 34 3/4, Cisco Systems was down 1/2 at 23 1/2, and Dell Computer fell 1 1/8 to 34 3/8.
* Many packaged food stocks surged on renewed takeover talk. Quaker Oats rocketed 5 7/8 to 82, General Mills jumped 1 5/8 to 55 3/8 and Kellogg leaped 2 1/8 to 56 5/8.
Overseas, 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 FTSE-100 index eased 7.7 points to 3,182.6. In Mexico City, the Bolsa index closed down 1.41 points at 2,698.24.
