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BusinessWeek.com
June 6, 2006
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Stocks Slip on Interest-Rate Fears

Investors continued to digest Bernanke's hawkish comments on inflation. Also in focus: Dow members IBM and GM

Stocks extended their woes for a second straight session Tuesday, finishing modestly lower amid worries over Federal Reserve Chairman Ben Bernanke's recent inflation-fighting remarks. Investors shifting into bonds and out of equities and commodities futures as part of a flight to safety, says Standard & Poor's Equity Research. But major indexes finished well above session lows, which S&P says probably indicates "bottom feeding" as the market neared a recent low point set May 24.

The Dow Jones industrial average fell 46.58 points, or 0.42%, to 11,002.14, after tumbling below the psychologically important 11,000 mark for some of the day. The broader Standard & Poor's 500 index edged down 1.44 points, or 0.11%, to 1,263.85. The tech-heavy Nasdaq composite slipped 6.84 points, or 0.32%, to 2,162.78.

Concerns about growth are joining inflation jitters in weighing on sentiment, some analysts say. "Inflation fears have suddenly morphed into a growth scare," says Richard Berner, chief U.S. economist at Morgan Stanley. "In our view it's too soon to sound the all-clear on cyclical inflation risks. But we believe that the growth scare for now will prove to be just that -- a scare."

Market players Tuesday continued to debate Bernanke's tough inflation talk from the previous session. Speaking at a forum of leading global bankers, the Fed chief called the recent uptick in core inflation "unwelcome," but he added that consumer spending has slowed "noticeably." Focus is on whether the Fed will raise interest rates for the 17th consecutive time at its next meeting, June 28 and 29.

Bernanke may have misfired by targeting specific inflation measures in his comments, says Michael Englund, chief economist at Action Economics. "If all he needed to do was hand-signal a tightening, it should have been easy," Englund says. "By bringing all these issues into play, he's adding volatility to the market and uncertainty as to just how many tightenings we're going to see."

In company news, IBM (IBM) was higher after a report the computer maker will spend $6 billion in India by 2009 to provide more consulting and computer services to global customers.

Shares in General Motors (GM) fell after CEO Rick Wagoner reportedly said the annual stockholders' meeting is likely to produce praise for the company's reductions in health-care and pension spending.

Chipmaker Advanced Micro Devices (AMD ) was lower despite saying it will extend market-share gains this year. Rival Intel (INTC) also fell, after a report the company might sell a major part of its communications businesses in an effort to strengthen the company against competition in its main markets.

Meanwhile, Google (GOOG ) was up on news the Internet search giant was set to launch an online spreadsheet application, offering a free alternative to Microsoft's (MSFT ) Excel program.

Analyst downgrades weighed on the financial sector. Credit Suisse cut both Fannie May (FNM ) and Freddie Mac (FRE ) from outperform to neutral.

In pharmaceuticals, Swiss drugmaker Novartis (NVS ) was down after striking a licensing deal reportedly worth up to $507.5 million for the rights to Human Genome Sciences' (HGSI ) hepatitis C drug.

The economic calendar was relatively quiet. Fed Governor Susan Bies said she is "uncomfortable" with the level of core inflation and doesn't know when the Fed will stop raising rates. Kansas City Fed President Thomas Hoenig said core inflation is "at the upper end" of his comfort zone, but is staying within a range. His remarks were relatively dovish, says Action Economics.

On the docket Wednesday, economists expect April consumer credit to rise $3 billion. In Washington, former Fed Chairman Alan Greenspan is set to testify on oil and the economy.

In the energy markets Tuesday, July West Texas Intermediate crude oil futures closed down 10 cents at $72.50, after the European Union gave Iran a set of incentives to curb its nuclear program.

European markets finished lower. In London, the Financial Times-Stock Exchange 100 index fell 92.3 points, or 1.6%, to 5,669.8. Germany's DAX index dropped 118.38 points, or 2.11%, to 5,502.81. In Paris, the CAC 40 index skidded 118.12 points, or 2.4%, to 4,797.91.

Asian markets finished lower. Japan's Nikkei 225 index tumbled 283.45 points, or 1.81%, to 15,384.86. In Hong Kong, the Hang Seng index slipped 43.12 points, or 0.27%, to 15,973.11. Korea's Kospi index was closed for a holiday after Monday sliding 7.42 points, or 0.57%, to 1,301.62.

Treasury Market

Treasuries ticked higher amid stagflation fears, after dipping initially on a report of hawkish comments by St. Louis Fed President William Poole, says Action Economics. Prices for 10-year Treasury notes rose modestly to 100-30/32 with a yield of 5%, while 30-year bonds climbed to 91-04/32 for a yield of 5.08%.