Financial Markets : Stocks, Bonds Forge Ahead as Rate Hike Fears Are Eased
Stocks and bonds rallied Friday after an anxiously awaited economic report failed to sound the kind of inflation alarm that had been feared.
The Dow Jones industrial average rose 52.90 points to 5,659.86, its biggest point gain since Aug. 1. The barometer of 30 big U.S. companies had gained nearly 75 points in the afternoon before succumbing to some profit taking. It gained 43.65 for the week.
Broader measures posted big gains as well, with technology and other economically sensitive shares benefiting most from renewed confidence that the Federal Reserve Board won’t move to slow economic growth--and profits--with an aggressive increase in the central bank’s lending rates.
“The market feels the Fed may now only need to raise interest rates nominally,” said Dan Ascani, president and research director at Global Market Strategists in Gainesville, Ga.
Before the stock market opened, bonds nose-dived, then quickly snapped back as traders reacted to a report saying the nation’s unemployment rate plunged to a seven-year low of 5.1% in August.
The unexpectedly steep drop in unemployment--from 5.4% in July--put the jobless rate well below the level that most analysts say the economy can maintain without inflationary pressures developing.
But other key elements of the report that factor heavily in production costs and inflation surprised investors by falling within the range of forecasts, causing many investors to rethink Thursday’s preemptive selling. Average wages rose by 6 cents an hour in the month, almost twice the monthly rate this year, said the report, which is one of the most closely watched as a gauge of economic strength.
“The bounce in stocks and bonds was largely due to being oversold coming in,” said Ascani. “It was one of the first times this year we’ve seen the bond market decline that much into a report, so [a strong reading] was really discounted.”
The initial sell-off in bonds sent the yield on the 30-year Treasury--a key determinant of borrowing costs--creeping toward the year’s high of 7.20%. But within minutes, the yield was back near late Thursday’s 7.15% and later fell to 7.10%.
Higher inflation makes existing fixed-income investments such as bonds less valuable, forcing down prices to increase their yield. Higher Fed and bond interest rates can hurt stocks by slowing consumer spending and raising corporate operating costs.
Robert Parry, president of the Federal Reserve Bank of San Francisco, said that while the economy is “likely to slow” in the coming months, the potential for an increase in the rate of inflation persists.
Although Fed economists estimate that growth will average between 2% and 2.5% for the rest of the year, Parry, in a speech in Bend, Ore., said that “it won’t be enough to relieve the pressures on our use of resources. So the potential is still there for upward pressure on inflation.”
Parry said the 5.1% unemployment rate in August was a surprise to him, but he also warned that “it’s a big mistake” to put too much evidence on a single month’s economic data.
“I don’t know for sure, but I’d be willing to bet a nickel that the unemployment rate moves up next month,” he said in an interview after his remarks.
On the New York Stock Exchange, advancing issues outnumbered decliners by a 7-3 margin.
The NYSE’s composite index rose 3.03 points to 352.67, and the Standard & Poor’s 500-stock index rose 6.24 points to 655.68.
The Nasdaq composite index rose 13.73 points to 1,139.39, and the American Stock Exchange’s market value index rose 3.31 points to 560.02.
Among Friday’s highlights:
* Technology shares were among the day’s biggest gainers. IBM jumped 2 3/8 to 115 1/2. Cisco Systems improved 1 1/2 to 53 3/8 and Dell Computer rose 1 1/4 to 69.
* Economically sensitive issues responded well to the unemployment and wage report. Caterpillar gained 1 1/2 at 71 3/4, Texaco rose 1 1/2 at 93, Sears added 1 3/8 at 44 1/2 and J.P. Morgan was up 1 3/8 at 88 3/8.
* A number of airline stocks also improved. AMR jumped 1 3/8 to 78 1/8. Southwest Airlines leaped 1 1/4 to 22 3/4 and Continental Airlines Class B shares rose 7/8 to 22 1/8.
* Shares of Verity plunged 50%, to 12 1/8, after the producer of Internet software said it will report an unexpected fiscal first-quarter loss because it failed to book four orders totaling about $1.5 million.
* Canandaigua Wine fell 5 to 17, a three-year low, after it halved its fiscal 1997 earnings estimate to between $1.10 and $1.40 a share.
* A warning of a second-quarter loss roughed up Workgroup Technology, a data-management software publisher, whose shares sank 8 5/8 to 6 3/8.
In the commodities market, crude oil extended a two-week rally, with crude for October delivery soaring 41 cents to $23.85 a barrel on the New York Mercantile Exchange. Crude prices climbed $1.60 this week, or 7.2%.
Overseas, Tokyo’s Nikkei stock average fell 1.1%, Frankfurt’s DAX index fell 0.5%, and London’s FTSE-100 rose 0.1%.
Market Roundup, D4
* JOBLESS RATE DROPS
The U.S. unemployment rate falls to 5.1%, a seven-year low. A1
