The “r” word–recession–may have been overplayed in recent weeks, but watch out for the “i” word: Inflation.
It’s been a while since market watchers cared about the monthly data on consumer price inflation, which seemed benign compared with sluggish profit growth and plunging consumer confidence.
But the consumer price index for January, due out Wednesday, suddenly is in the spotlight.
Last Friday’s surprising report of a 1.1 percent jump in January producer prices–the biggest month-to-month jump in more than 10 years–turned heads toward the ugly prospect of slow growth and inflation.
The more than 4 percent drop in the Nasdaq composite index Tuesday reflected continued worries about earnings in the computer technology and telecommunications sectors.
But an overlay of inflation fears, however tentative, compounded pessimism toward stocks generally. Bank stocks also fell sharply.
There is little chance that the Federal Reserve, which has been pumping up the nation’s money supply to ward off a recession, will stage aggressive interest rate cuts if inflation reasserts itself.
“Higher fuel costs are starting to be built into the base–into the cost of goods generally,” said Peter Jankovskis of Oak Brook Investments in Lisle. “Expectations of the magnitude and duration of interest rate cuts have been drawn in.”
At 3.4 percent, consumer price inflation last year was the highest since a 6.1 percent jump in 1990.
Fuel prices have been declining at the wholesale level, based on futures trading in crude oil, gasoline and natural gas. But last year’s spike in energy prices is radiating through a wide range of goods and services measured in the CPI.
However transitory, unexpected advances in inflation are not what the Wall Street brokers and wannabe tax-cutters in Washington wanna see right now.
Analysts surveyed by financial wire services expect the January CPI to rise 0.3 percent from December. The so-called core index, excluding energy and food prices, is expected to be up 0.2 percent.
Tuesday’s action: Stocks fell broadly in moderate trading Tuesday, as investors returned from a three-day weekend and hammered computer-technology and telecommunications shares.
With the fourth-quarter corporate financial reporting season nearly ended, analysts are beginning to fret that earnings shortfalls may not subside this year in the tech and telecom sectors.
The Dow Jones industrial average lost 68.94 points, to 10,730.88, on New York Stock Exchange volume of 1.10 billion shares. Declining stocks topped gainers by a 4-3 ratio among NYSE-listed stocks.
Slumping tech stocks pushed the Nasdaq composite index down 107.03, or 4.4 percent, to 2318.35, on Nasdaq trading volume of 1.88 billion shares. Cautious outlooks issued after the close of the regular session sent several stocks lower in after-hours trading.
Treasury securities closed lower ahead of the report on consumer price inflation.
Treasury auction: Interest rates inched higher at the Treasury’s weekly auction of 3- and 6-month notes.
The discount rate for 3-month bills was 4.905 percent, up from 4.900 percent last week. The rate for 6-month bills was 4.77 percent, up from 4.74 last week.
The coupon equivalent rates at Tuesday’s auction were 5.04 percent for 3-month bills and 4.95 percent for 6-month bills.
Local news: FMC Technologies, a unit of Chicago-based FMC, filed with the Securities and Exchange Commission for an initial public offering of stock, intended to raise $350 million. The unit develops equipment and services for offshore oil and gas production.
– Chicago-based Bank One closed down $1.87, or 5 percent, at $35.13. Goldman Sachs trimmed its investment rating on the stock to “market perform” from “market outperform.”
– The Robert R. McCormick Tribune Foundation, Chicago, plans to sell $100 million worth of Tribune Co. stock over the next 18 months to pay for grants and operations. The foundation owns 40.7 million Tribune shares, 13.5 percent of shares outstanding. Tribune closed at $40.93, up 23 cents.
– Industrial distributor Lawson Products, Des Plaines, completed the first phase of acquiring part of British distributor Premier Farnell PLC’s North American industrial products division (this sentence as published has been corrected in this text). Lawson fell 25 cents, to $27.25.
