FINANCIAL MARKETS : Strong Growth, Inflation Fears Hammer Stocks
Blue-chip stocks closed sharply lower for the second straight session Tuesday, while bond yields surged back above the 8% level as new signs of inflation rekindled fears that the Federal Reserve Board will raise interest rates again.
Crude oil prices rallied to the highest levels in three months as traders worried that new rules governing oil tanker owners might crimp crude supplies.
The Dow industrial average tumbled 44.75 points to 3,863.37, extending a 22.54-point slide Monday that more than erased its 55-point gain on Friday. The broader market also fell sharply, with declining issues outnumbering advances by about 13 to 5 on the New York Stock Exchange.
In the inflation-sensitive bond market, the yield on the bellwether 30-year issue shot up to 8.06%, to the 2 1/2-year high reached last week, from 7.97% on Monday. Its price, which moves in the opposite direction, plunged 7/8 point, or $8.75 per $1,000 in face value.
Roiling the markets was the National Assn. of Purchasing Management’s announcement that its index of economic activity rose sharply. Further fueling inflation fears, the Commerce Department reported that construction spending in September posted the biggest gain in six months, as private building staged a sharp turnaround.
“A couple of weeks ago, people thought inflation had died. It was just taking a nap,” said Peter Canelo, chief investment strategist at NatWest Securities.
“The report spooked the market,” said Bill Allyn, managing director at Jefferies & Co. “They worry that sooner or later investors will see that bonds are too attractive and will jump out of stocks.”
Canelo said the data virtually eliminated any chance that the Fed will hold off raising interest rates at a Nov. 15 meeting of the policy-setting Federal Open Market Committee.
Now, the experts said, the question is how much more tightening will be needed to cool the economy.
“The question really is not what they do on the 15th, but how much they do on the 15th, and more importantly, is it having an effect on slowing the economic momentum,” said Jack Shaughnessy, director of research at Advest.
In the currency markets, the dollar tumbled to touch an all-time low against the Japanese yen and fell against other currencies following the release of the manufacturing report. In New York, the dollar traded as low as 96.50 Japanese yen, matching its all-time intra-day low set Oct. 25. It closed at 96.65 yen, down from 96.85 on Monday. That was still an all-time closing low in New York. The greenback fell to 1.496 German marks, down from 1.504.
December crude jumped 49 cents to $18.68 a barrel amid concerns that tanker availability and refiners’ accessibility to crude oil supplies will be pressured by new U.S. rules taking effect at the end of the year. The rules require tanker owners to prove their ability to compensate pollution victims in the event of a spill.
Stocks also fell abroad. Tokyo’s 225-share Nikkei average lost 73.12 points to end at 19,916.48. In Frankfurt, the DAX average closed at 2,069.73, off 1.90 points, while London’s FTSE 100 average closed 1.1 points down at 3,096.3. Mexico’s market was closed for a holiday.
Among broader market indexes, the NYSE’s composite index fell 1.95 points to 256.74, while the Standard & Poor’s 500-stock index fell 3.93 points to 468.42. The Nasdaq composite index of mostly smaller companies fell 5.30 points to 772.19.
Big Board volume came to 314.95 million shares, up from 302.82 million on Monday.
Among the market highlights:
* Biogen fell 9 to 40 on news that it will not seek marketing approval for its Hirulog anti-clotting drug.
* Prudential Securities downgraded five major oil stocks, saying the shares were overvalued after a recent rally. Among them, Mobil dropped 2 1/8 to 83, Atlantic Richfield fell 1 1/4 to 107 1/8 and Texaco fell 1 3/8 to 64.
* Novell rose 1 1/2 to 20 in heavy trading on rumors of a possible takeover of Novell by IBM.
* Dow Chemical dropped 3 3/4 to 69 3/4 due to an unfavorable Texas court ruling on silicone-gel breast implants and general stock market weakness.
* U.S. Filter gained 1 1/2 to 21 3/4 after posting strong quarterly earnings. Alex. Brown upgraded the stock to “strong buy” from “buy.”
* General Motors fell 3/4 to 38 3/4 following negative comments in the Wall Street Journal about the company.
* Bergen Brunswig gained 1 3/8 to 17 7/8 a day after the distributor of products sold by pharmacies reported fiscal fourth-quarter earnings of 43 cents a share, compared to 21 cents a year ago.
* Philip Morris fell 3/4 to 60 1/2 two days after a Florida state court judge certified a class-action lawsuit against cigarette makers that broadly encompasses all smokers who allegedly became addicted to nicotine and contracted illnesses.
Market Roundup, D8
