Markets Plunge in Response to Government Economic Report

Strategic Insights -

The bond and stock markets experienced a sharp downturn yesterday morning following a government economic report that suggested accelerating inflation. The report indicated that manufacturing production had jumped more than expected last month, prompting traders and analysts to predict a rise in short-term interest rates. The Federal Reserve's announcement that factory use had reached a capacity of 84.7 percent in August, up four-tenths of 1 percent from the previous month, fueled fears of inflation. As a result, bond prices dropped, causing the yield on the 30-year bond to jump to 7.77 percent, its highest level since June 1992.

Key Takeaways:

  • The bond market plunged yesterday morning after the government economic report indicated accelerating inflation, with the yield on the 30-year bond jumping to 7.77 percent, its highest level since June 1992.
  • The stock market also experienced a sharp downturn, with the Dow Jones industrial average dropping 20.53 points to 3,933.35.
  • Traders and analysts predict that the Federal Reserve will raise short-term interest rates after its policy meeting on September 27, although some believe it may act earlier.
  • The increased pace of economic growth has led the Federal Reserve to raise interest rates in an effort to hold down inflation and keep the economy from over-heating.
  • The bond market's selloff was led by the release of the Federal Reserve's report on industrial production, which showed a 7/10th of 1 percent increase in August, exceeding expectations.
  • Analysts such as Richard Berner of Mellon Bank and John Lispky of Salomon Brothers believe that the economic data suggests a strengthening economy, which would likely lead to higher interest rates.
  • The stock market slide may have been touched off by the bond market's selloff, but it also followed Thursday's gain that was attributed mostly to a computer-driven surge in the last minutes of trading.
  • General Motors led the Dow industrials down, losing 1 1/8 to 50 1/2, while I.B.M. rose 1 1/4 to 71 in active trading after Goldman, Sachs set an $80 target within 6 to 12 months for the computer giant.

Statistics:

  • The yield on the 30-year bond jumped to 7.77 percent, its highest level since June 1992, following the government economic report.
  • The stock market experienced a sharp downturn, with the Dow Jones industrial average dropping 20.53 points to 3,933.35.
  • The bond market's selloff was led by the release of the Federal Reserve's report on industrial production, which showed a 7/10th of 1 percent increase in August, exceeding expectations.
  • Trading was unusually heavy, with 410.8 million shares exchanging hands on the New York Stock Exchange for its sixth-busiest day ever and second-busiest day this year.
  • The Dow plummeted 40 points in about 15 minutes after the opening of trading at 9:30 A.M., then recovered slowly over the remainder of the session.

Sources:

  • "In 30 minutes of trading frenzy, the stock and bond markets plunged yesterday morning in response to a Government economic report that raised the specter of accelerating inflation."
  • Richard Berner, chief economist at Mellon Bank, said: "I think the reaction was so strong because the conventional view had been that the economy was decelerating."
  • John Lispky, chief economist at Salomon Brothers, said: "There is no convincing, broad-based sign of any slowdown in the economy at all."
  • Jay Goldinger, market strategist at Capital Insight, said: "This was a slaughter today. It wasn't painful; it happened so quickly."
  • Joseph Liro, chief economist at S. G. Warburg, said: "It was much, much higher than the market expected. It just reached into all those fears about inflation that were there already."