Bond Yields Sink; Crude Drops
Hurricane Katrina, higher gasoline prices and signs of a slump in Midwest manufacturing heightened fears of an economic slowdown Wednesday, causing bond yields to plunge as traders bet that the Federal Reserve might have second thoughts about its campaign of interest rate hikes.
Near-term crude futures retreated from Tuesday’s record high, but another rise in gasoline prices lifted oil stocks again, helping to boost the benchmark averages on Wall Street. Stock indexes also got a lift from a range of companies likely to participate in hurricane cleanup and rebuilding work.
Bond traders have pushed Treasury yields lower for weeks, ignoring talk from Fed policymakers, stock market bulls and others of a robust U.S. economy.
That trend speeded up Wednesday in the wake of Katrina’s surprising toll and a manufacturing report indicating a downturn in the Chicago region for the first time in more than two years, which cast further doubt on the economy’s health. The National Assn. of Purchasing Management’s Midwest index fell to 49.2 in August from 63.5 in July; readings below 50 indicate contraction.
Treasury yields, which move in a direction opposite that of prices, fell broadly. The yield on the benchmark 10-year T-note sank to 4.01% from 4.09%, while the two-year yield dropped to 3.82% from 3.95%.
“Some of the bond traders are already saying, ‘I told you so,’ ” said Sung Won Sohn, an economist and chief executive of Hanmi Bank in Los Angeles. He expects the hurricane to cut second-half growth to about 3.5%, from a previous forecast of 4%.
In heavy trading on Wall Street, the Dow Jones industrial average gained 68.78 points, or 0.7%, to 10,481.60; the broader Standard & Poor’s 500 index rose 11.92 points, or 1%, to 1,220.33; and the technology-heavy Nasdaq composite index climbed 22.33 points, or 1.1%, to 2,152.09.
Winning stocks outnumbered losers by 3 to 1 on the New York Stock Exchange.
Oil futures dropped 87 cents to $68.94 a barrel in New York trading as the White House said it would release petroleum reserves and take other emergency steps to ease worries about supply disruptions.
But for consumers, the pain at the pump worsened as the average price of self-serve regular gas in California climbed to a record $2.844 a gallon from $2.809 on Tuesday, AAA reported.
Bond traders saw the hurricane as potentially upsetting the Fed’s plans, Sohn said.
Before Katrina struck, he said, some bond traders had been expecting the Fed to boost interest rates by a half-point at its next meeting in October, abandoning its “measured” pace of quarter-point hikes.
Since June 2004, the central bankers have enacted 10 straight quarter-point hikes in the federal funds rate in an effort to keep inflation at bay, lifting the short-term lending benchmark to 3.5% from 1%. Some Fed watchers have predicted that the tightening would continue until the rate reaches as high as 5% by mid-2006.
Now, Sohn said, “The Fed may take a wait-and-see attitude next time around,” meaning no hike until at least the following meeting as it analyzes the disaster’s economic toll.
Central bankers were cautious Wednesday in their comments about the hurricane, however. Fed Gov. Mark Olson told reporters it was “too early” to discuss the effect.
Joe Balestrino, fixed income strategist at Federated Investors in Pittsburgh, saw Wednesday’s Treasury rally as a knee-jerk reaction among traders. Although higher gasoline prices could crimp consumer spending, Balestrino disputed the notion that the Fed might pause from its rate hikes this fall.
“I haven’t heard the Fed even hint that they are going to stop or slow down,” he said. “For them to do so, they would have to conclude that this is a big enough event, economically speaking, to really slow things down.”
Even so, the possibility of a break in rate hikes -- and the certainty of a massive rebuilding effort along the Gulf Coast -- sparked a rally in the stocks of home builders, construction and engineering companies.
Modtech Holdings, which makes buildings for school and commercial use, rocketed 98 cents to $9.06.
Manufactured housing specialist Champion Enterprises vaulted $1.80 to $13.33 and mobile home maker Fleetwood Enterprises zoomed $1.03 to $10.11.
Among construction and engineering companies, Shaw Group, which said it was in contact with the Federal Emergency Management Agency to assist in the recovery effort, surged $3.05 to $21.10; Jacobs Engineering Group zipped $4.23 to $62.40 and Fluor soared $3.34 to $61.91.
Elsewhere, heavy equipment maker Caterpillar climbed $1.71 to $55.49, and Halliburton, whose KBR unit provides construction services, rose $2.16 to a 52-week high of $62.
In the energy sector, refiner Valero Energy jumped $9.71 to $106.50. Exxon Mobil rose $1.29 to 59.90 and Chevron surged 86 cents to $61.40.
The day’s losers included property insurers, who could face an estimated $25 billion in claims, and hospital companies, whose facilities withstood heavy damage in the hurricane.
Allstate eased 43 cents to $56.21, and St. Paul Travelers lost 94 cents to $43.01.
Tenet Healthcare, which said Tuesday that six of its hospitals were seriously damaged by Katrina, slumped 48 cents to $12.18.
Elsewhere in the sector, HCA fell 91 cents to $49.30 and Universal Health Services dropped $1.14 to $51.11 after brokerage analysts said they, too, would be affected by the hurricane.
