Inflation News Hurts Stock, Bond Prices
Surprisingly strong economic readings Tuesday upset Wall Street’s newfound optimism on inflation, sending stocks to steep losses as interest rates jumped in the bond market.
The Dow Jones industrial average fell 57.70 points to 5,647.28, its biggest drop since the market’s sharp pullback in mid-July. The yield on the 30-year Treasury bond rose 0.11 to 6.79%.
Although investors expect the Federal Reserve Board to decide to leave rates alone at its policymaking meeting Aug. 20, the economic data remind people “of the prospects for some tightening in the months ahead,” said Marshall Acuff, portfolio strategist at Smith Barney. “The fears faded for a while but didn’t disappear.”
The Dow 30’s fall was exacerbated by Philip Morris’ continuing weakness on tobacco litigation worries, but only three of the Dow’s components managed an advance in the session. Broader market measures also retreated, and the number of declining issues exceeded those making gains by a wide margin.
Before the stock market opened, the government reported that consumer prices and retail sales rose more than expected in July, arousing investors’ recently soothed worries about inflation.
The consumer price index, which was being watched closely in advance of the Fed rate-policy meeting, rose 0.3%, a bit more than many analysts had predicted. July retail sales were higher than expected too. In addition, private research organizations reported that consumer activity continued at a brisk pace in early August. Many economists have been looking for consumer spending, which can fuel inflation through too much demand, to slow during the second half of the year.
“Last week, all the numbers were indicating a slowdown, and these numbers make people wonder,” said Henry Herrmann, chief investment officer at Waddell & Reed of Overland Park, Kan. The rising yields and the increased concerns that there could be a Fed rate hike helped pull down stocks, which could suffer if rising borrowing costs slow consumer spending and raise corporate operating expenses.
Despite the renewed worries, however, the latest data were not expected to overshadow the tamer readings of recent weeks that had convinced many the Fed won’t raise its lending rates in an effort to keep the economy from accelerating too fast, which would drive prices higher.
Among market highlights:
* Tobacco shares retreated again in the aftermath of Friday’s jury award of $750,000 in damages to a lung cancer victim who sued Brown & Williamson Tobacco, a division of B.A.T Industries. Philip Morris fell 3 5/8 to 90 and was the Dow 30’s weakest issue. RJR Nabisco fell 1 1/4 to 26 5/8; Loews fell 1 3/4 to 75 3/4 and B.A.T fell 1/16 to 14 15/16.
* Financial concerns fell as interest rates rose, threatening to raise their borrowing costs on the money they lend. J.P. Morgan, also a Dow component, fell 1 3/8 to 90 1/4. Merrill Lynch lost 2 3/8 to 63 3/8, and Wells Fargo fell 1 3/4 to 247.
* Wal-Mart edged up 1/4 to 26 1/8 after it reported second-quarter earnings that came in a shade above Wall Street forecasts. Wal-Mart said it expected further earnings growth for the second half.
* Deere rose 2 3/8 to 38 3/4 after reporting quarterly earnings that topped forecasts by 2 cents a share.
* Genzyme added 3 1/4 to 26 1/2 on news that the Food and Drug Administration had approved its Seprafilm product for use in any open abdominal or pelvic surgery. Seprafilm is a membrane used to prevent adhesions after surgery.
Overseas, Tokyo’s Nikkei-225 stock average rose 1%, Frankfurt’s DAX index rose 0.4%, and London’s FTSE-100 rose 0.5%.
Oil prices rose again, surprising analysts, who remain baffled by the market’s resilience in the face of record high world oil supplies and the imminent appearance of the first exports of Iraqi oil in more than six years.
Heating oil supplies in the Northeast are reported to be low, however. Heating oil for September delivery hit a new contract high at 60.25 cents a gallon before closing at 60.01 cents a gallon, up 0.45 cent, on the New York Mercantile Exchange.
September crude oil also set a new contract high before closing at $22.37 a barrel, up 15 cents. September unleaded gasoline closed at 63.09 cents a gallon, up 0.20 cent.
Market Roundup, D5
