Financial Jitters, Energy Prices, Batter Stock Market Producer Price Index Takes Biggest Jump In Seven Months During November

The biggest jump in energy prices in seven months sent wholesale inflation up 0.4 percent in November, a worrisome increase that added to financial markets’ jitters.

The Dow Jones industrial average fell 70.73 points Wednesday to close at 6,402.52, as stocks were battered from falling bond prices. The declines were blamed on the inflation report and a range of other concerns.

Private economists dismissed the 0.4 percent overall increase in the Producer Price Index, which measures inflation pressures before they reach consumers, and looked instead at a much more modest 0.1 percent increase, excluding energy and food.

But investors were not mollified by the modest gain in the so-called core rate of inflation. They worried that the 0.4 percent increase was coming on top of a similar big gain the month before.

Additionally, investors dumped stock and bond holdings on two published reports. The Wall Street Journal raised concerns that Japanese investors were losing interest in purchasing U.S. Treasury securities, while The Washington Post quoted unnamed officials of Saudi Arabia as suggesting that the United States use military or diplomatic action against Iran early next year if Iran is linked to the bombing of a military housing complex in Saudi Arabia.

Many private economists dismissed worries that demand for U.S. securities by the Japanese, which has helped spur both the bond and stock markets, would be coming to an end any time soon, given the wide difference between interest rates in Japan and higher U.S. rates.

They said Federal Reserve Chairman Alan Greenspan’s recent comments had simply triggered a reality check in which investors are rethinking stock purchases.

“The market is just looking for reasons to sell,” said Astrid Adolfson, financial economist with MCM MoneyWatch in New York. “The market will be vulnerable to further profit-taking as we get to the end of the year.”

David Jones, chief economist at Aubrey G. Lanston & Co., a government securities dealer in New York, said it was entirely possible that the market’s current mid-course correction could see a drop of 800 to 1,000 points on the Dow.

“The stock market is in for a bumpy road ahead. The market just overdid its enthusiasm in the past month, and that was what Greenspan was trying to warn about,” Jones said. Greenspan during a dinner speech Thursday night questioned whether investors had been gripped by “irrational exuberance,” in comments that sent markets plunging worldwide as investors feared the central bank was prepared to start raising interest rates.

Private economists continued to insist that they saw nothing on the inflation front that would make the Fed move when the central bank holds its last meeting of the year next Tuesday.

“With inflationary pressures remaining benign, the Federal Reserve will clearly remain on hold for the rest of this year and most of 1997,” said Cheryl Katz, senior economist at Merrill Lynch.

So far this year, wholesale prices have been rising at an annual rate of 2.6 percent, compared to a 2.2 percent increase in 1995.