Inflation Fears Pound Markets

L.A. Times Archives

April 11, 1996 12 AM PT

From Times Staff and Wire Reports

U.S. stock and bond markets were hammered Wednesday by a surge in key commodity prices, spooking some investors on the eve of reports on March inflation trends.

The Dow Jones industrial average tumbled 74.43 points, or 1.3%, to 5,485.98--its fourth straight decline, and the lowest close since March 8, when it plunged 170 points on the heels of a strong report on U.S. job gains in February.

In the bond market the bellwether 30-year Treasury bond yield leaped to an eight-month high of 6.94% from 6.83% on Tuesday, pulling shorter-term yields up as well.

Stock and bond markets had been weak all day, but selling didn’t escalate until the final hour. Analysts said traders were squaring positions ahead of the government’s report today on March wholesale inflation, and Friday’s report on March consumer inflation.

Because the U.S. economy has shown surprising strength so far this year, more investors are worrying that that strength will begin to translate into higher prices for goods and services. And any sign of higher inflation could be devastating for Wall Street, because inflation erodes the value of financial assets.

Inflation concerns were magnified Wednesday by a fresh surge in prices of some basic materials and foodstuffs, including coffee, crude oil, corn and wheat. Prices of many commodities have been rising this year, belying the supposedly weak world economic situation.

Yet many economists point out that sharply higher commodity prices don’t necessarily mean higher inflation at the consumer level. Raw materials often comprise only a small portion of the cost of finished goods. And global competitive pressures keep many companies from raising prices significantly on their goods.

Indeed, the March wholesale and consumer inflation reports, due today and Friday, respectively, are expected to show that inflation overall remains subdued.

Still, “broad-based commodity price increases are going to filter into” the government’s inflation indexes to some extent, said Kevin McClintock, who manages $5 billion of bonds at the Dreyfus Co. in New York.

“The market’s going to focus on the inflation picture until you get some data that suggests we do otherwise,” said John Burgess, who helps manage $70 billion of bonds at BT Global Investment Management in New York. “Right now, people are worried about the jump in commodities, including oil.”

The May futures contract for oil on the New York Mercantile Exchange shot up $1.15 to $24.21 a barrel Wednesday, as U.S. oil stockpiles remain near their lowest in 20 years and many refiners scramble for available supply.

Corn and wheat prices, which have been rising steadily all year because of dwindled grain inventories worldwide, rose further on Wednesday. And coffee continued to rebound from last year’s plunge.

For the bond market, already reeling from interest rates’ sharp surge in recent months on surprisingly strong economic data, Wednesday’s commodity gains were a handy excuse to sell.

The same went for the stock market, traders said. Although stocks have generally taken a positive view of the economy’s growth, higher interest rates are beginning to justify profit-taking.

“Higher rates are going to scare some people, and the stronger dollar is starting to hurt some of the multinational” companies, said Stephen Mindnich, senior trader at Jefferies & Co.

The dollar’s strength in recent days has sparked selling of multinational companies’ stocks on worries that their overseas earnings will be hurt by currency losses.

The dollar ended at a new 26-month high of 108.40 Japanese yen in New York on Wednesday.

In the stock market, losers outnumbered winners by nearly 2 to 1 on the New York Stock Exchange on Wednesday, in the heaviest trading in several weeks.

The Standard & Poor’s 500 index slumped 1.4% with the Dow. But smaller stocks fared better. The Russell 2,000 index of smaller issues eased just 0.4%.

For the Dow index, four days of losses have left it 3.6% below its record high of 5,689.74 set on April 3. And the market still is fearful of first-quarter earnings reports.

Analysts point out that a normal “correction” in a nervous market could easily cut 10% off the Dow.

Among Wednesday’s highlights:

* Blue-chip multinational shares getting hammered included Boeing, down 1 5/8 to 80 1/2; Coca-Cola, off 2 7/8 to 78 7/8; GE, down 1 3/4 to 76 5/8; and Disney, off 2 5/8 to 60 7/8.

Multinational drug stocks also were trashed. Merck slumped 2 3/8 to 58 3/4, Bristol-Myers sank 3 3/8 to 80 and Johnson & Johnson dove 3 to 88 1/4.

* Financial services stocks dove again as interest rates rose. Federal National Mortgage tumbled 1 1/8 to 29 7/8, Wells Fargo slumped 6 to 245 and Aetna lost 1 3/4 to 70.

Utilities also were hurt, with the Dow utility index losing 1.4% to 206.89.

* On the plus side, some tech issues continued to rebound. Sun Microsystems gained 1 3/4 to 48 1/2, Motorola leaped 3 3/4 to 56 1/4 and Oracle rose 1 3/4 to 43 1/4.

* Some commodity-related stocks also gained, including International Paper, up 5/8 to 39 7/8; Phelps Dodge, up 1 1/4 to 72 1/4; and Alcoa, up 1 to 65 3/8.

In foreign trading, Tokyo, London and Frankfurt shares advanced, showing remarkable resilience in the face of the U.S. market’s recent troubles.

* GRAIN PRICE TRAIN

What’s driving wheat, corn prices. D3

* BOFFO BOLSA

Mexican stocks in rally, but can it continue? D2

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Commodity Surge

How prices of key commodities have jumped this year. Gains for nearest-term futures contracts on various U.S. exchanges:

Coffee: +25.3%

Oil: +23.8%

Corn: +20.6%

Lumber: +11.3%