Stocks, Bonds Pounded as Rate Worries Grow

Bond yields rose again Thursday and stocks declined broadly as traders nervously awaited today’s August employment report, which could set the stage for an interest-rate hike by the Federal Reserve Board.

The yield on the bellwether 30-year Treasury bond surged to 7.15% from 7.09% on Wednesday, and now is the highest since July 8--shortly after the June employment report stunned economists with its strength.

On Wall Street, the Dow Jones industrial average dropped 49.94 points to 5,606.96, its lowest close since Aug. 1.

The Nasdaq composite index of mostly smaller stocks tumbled 18.16 points, or 1.6%, to 1,125.66, slammed by fresh weakness in some technology stocks on earnings concerns.

Bond yields have been rising over the past four weeks as data have continued to point to a healthier-than-expected economy.

The Fed, the nation’s central bank, has warned fairly clearly that it would be ready to tighten credit--and therefore restrain growth--if a slowdown didn’t occur naturally in August.

Today’s August employment report is viewed as critical in the Fed’s decision-making process, because it will show not only the pace of hiring last month but also how much employers are raising wages. Fast wage growth is often a precursor to higher inflation in the economy.

Dallas Fed President Robert McTeer, a voting member of the Fed’s policy committee, said during a speech in Houston on Thursday that the economy was “running hot.” Even so, McTeer said he was “not worried” about rising inflation.

“If I were on the Fed voting, I’d vote for a tightening” of credit, said Kevin McClintock, who oversees the $5 billion of taxable bond funds at Dreyfus Corp. “We are seeing signs of wage inflation and tighter labor markets.”

But even if the Fed chooses to boost its benchmark short-term interest rate from the current 5.25%, many economists say the rate may only have to rise to 5.75% or 6% before the economy responds by slowing.

Bullish bond investors contend that long-term yields, at the current 7.15%, may not rise much more even if the Fed raises short-term rates.

Still, for Wall Street, any credit-tightening move by the Fed has historically triggered a sell-off in stocks.

Among Thursday’s highlights:

* Retail stocks were generally lower even though many chains reported decent gains in August sales. Many of the stocks had risen Wednesday in anticipation of Thursday’s sales reports.

Sears fell 1 5/8 to 43 1/8, J.C. Penney lost 1 3/8 to 54 1/8, Federated sank 1 3/8 to 32 7/8 and Dayton Hudson was off 1 3/8 to 33 1/4.

Also, Gap plunged 4 7/8 to 29 after it reported no increase in August sales at stores open at least one year. It was a terrible performance for normally fast-growing Gap. “Everyone has been promoting jeans and khakis. Gap didn’t mark theirs down and they got killed,” said Joseph Ronning, an analyst at Brown Brothers Harriman.

* Specialty semiconductor stocks tumbled after Zilog, which makes computer chips for modems, said a slowdown in sales will hurt third-quarter earnings.

Zilog plunged 8 1/8 to 15 3/4. Also falling were International Rectifier, down 3 3/8 to 14 5/8; Xilinx, down 3 1/4 to 32 5/8; Microchip Technology, down 5 1/4 to 31 1/8; and Altera, down 3 3/8 to 39 5/8.

* Another tech firm, Hutchinson Technology, a maker of computer disk drive assemblies, slumped 5 1/64 to 34. The company said it is only breaking even for the quarter ending in September.

Also, multimedia software firm Macromedia fell 3 11/16 to 19 1/8. The company warned analysts that sales in this quarter could be down 10% from the previous quarter.

* On the plus side, some energy stocks gained more ground as oil prices rose again. Unocal added 1/2 to 35 5/8, Mobil was up 1/4 to 115 5/8 and Halliburton rose 3/8 to 53 1/2.

In foreign trading, Mexico’s Bolsa index fell 23.27 points, or 0.7%, to 3,306.72. But Tokyo’s Nikkei-225 index rebounded 0.9% to 20,379.

Market Roundup, D6