FINANCIAL MARKETS : Interest Rate Fears Push Dow Down 17.49
Fears of higher interest rates pushed stocks sharply lower for the second consecutive session Wednesday as yields on Treasury securities shot higher.
The Dow Jones industrials extended a 67-point loss suffered Tuesday and fell an additional 17.49 to 3,851.60. An unexpectedly sharp rise in the nation’s trade deficit Tuesday had led analysts to fear that the Federal Reserve Board would soon raise short-term interest rates.
Those fears were supported early Wednesday when Wayne Angell, former Federal Reserve governor and current chief economist at Bear, Stearns & Cos., said there was a 60% chance that the Fed would tighten policy at its Sept. 27 open market policy meeting.
Angell’s statement, plus an unexpectedly large increase in housing starts, moved the markets.
The 30-year Treasury bond hit 7.80%, its highest close since June 24, 1992. Short-term bills were hit too, with the discount rate on three-month bills up by 0.18 percentage point to 4.79%. The bill’s yield to maturity jumped to 4.91%.
“People are giving more credence to the fact that the Fed may move next week,” said Joe LaVorgna, money market analyst at the UBS Securities unit of Union Bank of Switzerland.
Fund managers and stock pickers face flat returns this year, and “with worries about the Fed raising rates again, and so little confidence in the capability of the stock market to make new gains, the temptation is definitely there to try to lock in this quarter’s profits,” said Jim Solloway, research director at Argus Research.
“There’s a good degree of wanting to move fast, owing to a lack of confidence about the future.”
Stocks were also responding to weakness in the dollar, which ended lower against the Deutsche mark and marginally higher against the Japanese yen.
“There are two big uncertainties,” said Dick Hoey, chief economist at Dreyfus Corp. “Will the dollar plunge against the yen, and will the public willingness to buy stock funds evaporate? If either of those things happen, that will be very bearish for the market.”
Declining issues outnumbered advancers by about 12 to 5 on the New York Stock Exchange, where volume totaled 351.84 million shares, up from 325.89 million on Tuesday.
Broad market indexes also lost ground. The NYSE’s composite index fell 1.20 to 254.71. The Standard & Poor’s 500-stock index fell 1.90 to 461.46. The Nasdaq composite index fell 6.03 at 760.71.
At the American Stock Exchange, the market value index fell 3.38 to 454.77.
Treasury bond yields started out firmer, but they dipped after the government reported that housing starts rose 2.1% in August, boosted by a double-digit jump in apartment construction. The report suggested to analysts that the economy may be growing faster than expected, stirring fears of inflation. But the report also indicated that single-family construction, which represents about 80% of new housing construction, fell 2.7% in August.
The 30-year bond yield stood at 7.80% at the end of yesterday’s session, up from 7.77% on Tuesday. With the long bond approaching 8.0%, bonds are becoming more attractive, said Bernadette Murphy, executive director at M. Kimelman & Co. “If investors can get an 8% return . . . without any risk, they will tend to go into a yield instrument rather than buy stocks.”
Stocks attempted a recovery in late morning as bonds trimmed their losses, but then headed south again in early afternoon. The Dow Jones industrials were down 48 points in mid-afternoon before a technical rally cut those losses by more than three-fifths near the end of the session.
Among Wednesday’s market highlights:
- Economically sensitive stocks were hit hard by the specter of higher interest rates. The Federal National Mortgage Assn. fell 1 3/8 to 80 3/8.
Industrial stocks were hit hard, amid the perception that higher interest rates could derail the economic recovery. Caterpillar led the Dow industrials lower and fell 1 1/4 to 54 1/8. Auto and paper issues also fell.
Retail stocks fell after Prudential Securities downgraded Nordstrom stock to “hold” from “buy” and cut its estimate of the department store company’s future profits, saying sales growth will be lower than expected. Nordstrom fell 2 15/16 to 39 13/16 in Nasdaq trading.
Digital Equipment led the action on the NYSE and rose 1 1/8 to 29, extending Tuesday’s gains after Cowen & Co. upgraded the stock.
- Overseas stock markets were mixed, with the Tokyo and Frankfurt markets rising but London and Mexico City falling.
- Coffee rose to its highest price in more than two months amid concern that a lack of rain in Brazil is adding to crop damage caused by two frosts during June and July. Coffee for December delivery rose 3.35 cents to $2.3135 a pound on the Coffee, Sugar & Cocoa Exchange.
Little to no rain has fallen in coffee growing regions of the country since a second frost stung coffee trees on July 10. No rain is expected until at least next Monday, and longer range forecasts call for hotter and drier weather than normal.
