Fed Officials’ Remarks Send Yields Up, Stocks Down
Stocks dropped for a second day Wednesday, after two Federal Reserve officials made comments that pushed bond yields higher.
The Dow Jones industrial average ended 35.84 points down at 5,673.83, but an improvement over the deficit of nearly 65 points it showed about an hour before the close.
“It appears we’re in a period of digestion,” said Richard Cripps, chief market strategist at Legg Mason Wood Walker. “There’s the belief we need to consolidate and head a little lower. Nothing much more than that.”
The blue-chip measure, which set two record highs last week, has now shed more than 100 points since last Wednesday. Both the Dow 30 and Standard & Poor’s 500 ended below their closes of May 17, but they are still up 10.9% and 8.4%, respectively, for the year.
Declining issues outnumbered advancers by 9 to 5 on the New York Stock Exchange, where volume totaled 346.13 million shares as of 4 p.m., up from Tuesday’s figure.
The dollar ended a three-day rally Wednesday, plunging against the German mark and slipping against the Japanese yen.
The dollar traded at 1.5360 marks, down from 1.5464 marks Tuesday. The dollar fetched 108.20 yen, down from 108.85 yen Tuesday.
Meanwhile, grain prices plummeted as growing weather improved, and oil prices also fell, pushing commodity indexes down to eight-week lows.
The Knight-Ridder Commodity Research Bureau’s index of 17 commodity futures fell as much as 2.43 points to 253.20, its lowest level since April 3; it closed at 253.87, down 1.76 points.
In the stock market, broad-market measures were modestly lower until early afternoon, when traders took note of a speech by Fed Governor Susan Phillips, who gave an upbeat assessment of the economy but noted signs of higher inflation. Higher inflation can hurt the value of fixed-income investments such as bonds.
After news of her remarks hit the market, bond prices fell sharply and the yield on 30-year Treasuries--a benchmark that affects borrowing costs for consumers and corporations--jumped to 6.94% from 6.85% on Tuesday. Higher interest rates can mean lower profits and higher operating costs.
Phillips pointed to growing payroll and wage levels, which can accelerate inflation by speeding up consumer spending. She also noted recent increases in food and energy prices.
“Her comments rattled bond traders,” who now expect the Fed to raise short-term rates to slow economic activity, said Russ Labrasca, senior vice president at Sutro & Co. of San Francisco.
After Phillips made her remarks, J. Alfred Broaddus Jr., president of the Richmond, Va., Federal Reserve Bank, used the word “tighten” to describe what the economy might need.
“He is always the most extreme spokesperson about the forces of inflation and making sure that we don’t let them get rekindled,” said Carol A. Stone, a senior economist at Nomura Securities International Inc.
“The key thing is he used the T-word,” said Waldo Best, a senior economist with Barclays de Zoete Wedd Securities Inc.
“The market was very soggy to begin with in that we really didn’t have any overall conviction one way or another,” Best said. “This provided the market with some conviction--it was all negative.”
Analysts said said the markets are now becoming worried that the revised numbers on first-quarter economic growth, scheduled for release Thursday, will not be lower, as expected.
The initial reading on first-quarter gross domestic product came in much higher than expected, prompting concerns that big gains in employment were translating into inflation. But subsequent readings on wholesale and consumer prices were mild, helping encourage the latest rallies in the financial markets.
Eric Miller, chief strategist at Donaldson, Lufkin & Jenrette Securities in San Francisco, noted that investors have become concerned about overpricing and are bracing for next week’s pivotal economic reports.
“The weekend press was focused on just how far we’ve come and how speculative the market seemed, and there’s an awareness about next week’s important data,” Miller said.
Among market highlights:
* General Nutrition slumped 4 1/2 to 14 and topped the Nasdaq actives list. The nutrition supplement retailer warned that results for rest of the year would not meet Wall Street expectations. The company cited softness in its diet and herbal product sales.
* Texas Instruments fell 1 to 53.625. Chief Executive Jerry R. Junkins, 58, died of a heart attack arrest during a business trip in Europe. William P. Weber and William B. Mitchell, the vice chairmen who had been sharing management duties with Junkins as part of a three-man chief executive’s office, will take charge in the near term.
* Food and drug retailer American Stores rose 3 to 38 after reporting stronger first-quarter profits.
* Australian Internet access provider OzMail rose 1 1/2 to 15 1/2 in its Wall Street debut.
* SCB Computer Technology slid 9 1/4 to 19. The company said preliminary results of an internal review show possible overbillings of less than $50,000 to the Tennessee Valley Authority in connection with a now-completed consulting contract. The company warned that a government investigation could result in the imposition of criminal or civil fines or sanctions including the exclusion of the company from future federal government contracts.
Overseas, Tokyo’s Nikkei-225 stock average rose 0.4%, Frankfurt’s DAX index fell 0.3% and London’s FTSE-100 rose 0.4%.
