Bonds, Dow Tumble on Economic News

U.S. bonds posted their biggest loss in more than a year and the stock market slumped Friday after two surprisingly strong economic reports triggered fears that the Federal Reserve Board would raise interest rates in a bid to preempt inflation.

“It brings [Fed Chairman Alan] Greenspan back onto the radar screen,” said Edward Rydwelski, an analyst at CNA Insurance Cos. in Chicago.

The inflation-sensitive 30-year Treasury bond fell 2.13 points, the biggest slump since July 5, 1996. Its yield, which moves in the opposite direction, rose 0.16 percentage points to 6.45% from Thursday’s 6.30%.

The drop marks the first setback in a week for bonds, which on Thursday finished their best month since May 1995. Even after Friday’s rout, 30-year bond yields are the same as a week ago and 0.29 percentage point lower than a month ago.

Meanwhile, the Dow Jones industrial average fell about 120 points during the session but regained much of the ground it lost and closed down 28.57 points at 8,194.04. The Nasdaq composite rose 0.52 point to a record 1,594.33, but other broad indexes closed lower.

The one-two punch began with the Labor Department’s employment report and was followed by the National Assn. of Purchasing Management index, analysts said.

The Labor Department said the unemployment rate fell to 4.8% in July, the lowest in nearly 25 years, and the economy added 316,000 jobs, stronger than had been forecasted.

The NAPM report showed that industrial activity and prices paid by manufacturers both registered unexpectedly sharp increases last month.

Analysts said the economic data revived the financial community’s lurking fears of inflation--and the prospect of an interest rate hike by the Fed to head it off.

Following the reports, investors immediately began selling shares, intent on cashing in on some of the market’s dizzying gains.

“The image I use is that of a forest that hasn’t experienced a fire in a very long time,” said Charlie Crane, chief market strategist at Key Asset Management. “You get one spark, and suddenly you have a blaze on your hands.”

The Fed raised short-term rates in March, the first increase in more than two years, but has held them steady since.

Declining issues outnumbered advancers by a 7-to-4 margin on the New York Stock Exchange in heavy trading.

The Standard & Poor’s 500-stock list fell 7.15 points to 947.14, and the NYSE composite index fell 3.52 points to 490.98.

The economic data and the specter of higher interest rates had the opposite effect on the dollar, which hit a high of 1.8665 German marks, a level not seen since November 1989. The dollar’s rise was also fueled by concern about Europe’s sluggish economy and uncertainty about the planned single currency.

In late trading, the dollar stood at 1.8628 marks, up from 1.8385 late Thursday.

The Japanese yen benefited from the mark’s weakness, and the dollar settled in New York at 118.40 yen versus 118.59 yen Thursday.

Among Friday’s highlights:

* International oil stocks sank amid concern that crude oil prices are about to drop. The United Nations said it may approve an Iraqi aid plan Monday, paving the way for oil exports from Iraq for the first time since early June. The country has been prohibited from selling oil since its invasion of Kuwait in 1990.

At the New York Mercantile Exchange, gasoline for September delivery rose 2.27 cents to 65.07 cents a gallon and set a life-of-contract high during the day.

Exxon fell 50 cents to $6.75; Mobil dropped $1.50 to $75; Chevron lost 38 cents to $78.63; and Amoco was off $1.25 to $92.75.

* A surge in chip shares spurred the Nasdaq’s late-day recovery. Intel rose $1.81 to $93.63; Texas Instruments rose $6.88 to $121.88; and Applied Materials rose $4.66 to $96.53.

Overseas, Tokyo’s Nikkei stock average fell 2.6% Frankfurt’s DAX index fell 0.7% and London’s FTSE-100 fell 0.2%.

Market Roundup, D4

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Rate Whiplash

Bond yields surged on Friday from Thursday’s 18-month low, as economic data pointed to unexpected strength. Daily closes of the 30-year Treasury bond since July 1:

Friday: 6.45%

* Source: Bloomberg News