Fed Officials’ Remarks Send Yields Up, Stocks Down

Stocks closed broadly lower for a second day Wednesday, after two Federal Reserve officials made comments that helped push bond yields higher.

Elsewhere, grain prices plunged and the dollar weakened.

On Wall Street, the Dow Jones industrial average, which fell 53.19 points Tuesday, ended off 35.84 points at 5,673.83, although it fought back from a 65-point loss about an hour before the close.

Shares also pulled back in the Nasdaq market of mostly smaller stocks, as profit taking continued to slam some of the issues that had surged the most in the market’s run-up to record heights in recent weeks.

The Nasdaq composite issue dropped 10.67 points to 1,225.63.

Losers outnumbered winners by 1,535 to 852 on the New York Stock Exchange and by 2,239 to 1,652 on Nasdaq.

Traders said stocks’ sudden weakness in large part reflected fresh nervousness in the bond market over the U.S. economy’s next move.

Bond yields, which had steadied over the last two weeks on hopes the economy might weaken somewhat this summer, turned up sharply Wednesday.

The initial catalyst was comments by Fed Gov. Susan Phillips, who gave an upbeat assessment of the economy but also noted signs of higher inflation emerging.

After news of her remarks hit the market, bond prices fell sharply and the yield on the benchmark 30-year Treasury bond jumped to a three-week high of 6.94% from 6.85% on Tuesday.

Phillips, in a speech, described the economic expansion as “on a solid track” and called the outlook for consumer spending “reasonably solid.” She also mentioned that the Fed was keeping a close eye on rising food and energy inflation and on “spotty” signs of upward pressure on wages.

Some bond traders took her remarks as another hint that the Fed is unlikely to lower short-term interest rates any further, and may instead be mulling whether to raise rates later this year.

In fact, in another speech, J. Alfred Broaddus Jr., president of the Federal Reserve Bank of Richmond, Va., used the word “tighten” to describe what the economy might need to contain inflationary pressures.

“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, economist at Nomura Securities International.

In the midst of new worries about interest rates’ trend, the Treasury’s sale of $18.75 billion of two-year notes Wednesday saw weaker-than-expected demand. The yield on the notes was 6.053%, and the ratio of bids received to those accepted was 2.36 to 1, which was below the 2.42 average of the last 10 auctions.

“The two-year note auction was expected to go a little stronger,” said William Gamba, head of government bond trading at Cowen & Co. in New York. “It wasn’t a disaster but it wasn’t as strong as anticipated.”

The Treasury will sell $12.5 billion of five-year notes today.

Bonds couldn’t seem to derive any strength from commodity markets, even though a key commodity price index fell to an eight-week low Wednesday, as grain prices continued to tumble amid signs of more favorable Midwest crop weather.

Rocketing grain prices had fanned inflation worries in April and early May. But Wednesday, grain prices were pressured by a stampede of professional speculators selling out of the market amid expectations that drier weather would aid planting and boost badly needed crop yields this fall.

July wheat futures in Chicago sank 20 cents to $5.26 per bushel, and July corn futures ended down 12 cents a bushel at $4.66 1/2. July soybeans closed 26 1/2 cents lower at $7.75.

Cotton futures also closed sharply lower for a second straight day as forecasts called for another round of showers in drought-stricken west Texas, a key growing region.

Back on Wall Street, some traders said the stock market’s pullback remained orderly.

“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.”

Among Wednesday’s highlights:

* The Dow index was led lower by AlliedSignal, off 1 3/8 to 55 1/2; Disney, down 1 5/8 to 60 1/2; and IBM, which fell 1 3/8 to 106 7/8.

* Recent high-flying stocks that continued to fall in profit taking included Presstek, down 10 3/4 to 156; Optical Cable, off 7 to 71; Forte Software, down 9 1/2 to 59 3/4; Corrections Corp. of America, off 2 7/8 to 77 3/4; and Oakley, off 3 to 50.

But Iomega rebounded 4 1/2 to 43 3/8 after two days of sharp declines, and PairGain Technologies jumped 4 to 98.

* SCB Computer Technology plummeted 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 overbilling could result in fines and other penalties, the firm warned.

* General Nutrition slumped 4 1/2 to 14 in heavy trading after the specialty retailer warned of weaker sales and earnings.

* Energy stocks were broadly lower with another decline in crude oil prices. Exxon fell 1 1/4 to 85 1/8, Mobil lost 1 to 111 3/4 and Unocal eased 1/2 to 32.

* On the plus side, food and drug retailer American Stores shot up 3 to 38 after reporting stronger first-quarter profit.

* Drug stocks were mixed. Johnson & Johnson fell 1 1/8 to 96 1/4 and Bristol Myers sank 1 7/8 to 84 3/4, but Merck rose 1/8 to 63 3/4 and Eli Lilly jumped 1 1/8 to 62 1/2.

In foreign trading, Mexican shares followed Wall Street lower. The Bolsa index slid 35.87 points, or 1.1%, to 3,279.48. Brazil’s Bovespa stock index dropped 1.5% and Argentina’s Merval index lost 1.9%.

In currency trading, the dollar ended a three-day rally, tumbling against the German mark and slipping against the Japanese yen.

The dollar traded at 1.536 marks in New York, down from 1.546 on Tuesday, and at 108.20 yen, down from 108.85.