June 6, 2007 in Business

Stocks decline after Bernanke comments

Associated Press The Spokesman-Review

Currency rates


Wall Street skidded lower Tuesday after comments from Federal Reserve Chairman Ben Bernanke and a strong reading on the service sector suggested the central bank has little reason to lower interest rates.

Bernanke’s speech by satellite to an international monetary conference in South Africa Tuesday spurred investors to sell a day after the Dow Jones industrials and Standard & Poor’s 500 index edged up to new highs. Bernanke remarked that the economy will recover from its recent feeble performance, despite a housing slump that he said could drag on the economy for longer than anticipated.

His forecast for rebounding growth, as well as his assessment that inflation is “ebbing” but remains “somewhat elevated,” made it appear unlikely the Fed will lower rates anytime soon, a disappointment for Wall Street. Behind the stock market’s surge, driven primarily by strong takeover activity, has been a backdrop of stable interest rates and the possibility of a rate cut; recently, though, with bond yields creeping up, some investors fear the Fed may alter that climate.

“The market is hoping for slow growth and moderate inflation, and now there’s concern they might have to bump up rates in the second half of the year,” said Jim Herrick, director of equity trading at Baird & Co.

While the Fed chairman’s comments stalled a months-long rally, many analysts have been predicting Wall Street would soon pull back before heading higher later this year. His remarks also came in a week where investors had few economic or corporate catalysts to provide direction.

The Institute for Supply Management issued its service sector report Tuesday. The ISM’s nonmanufacturing index came in at 59.7 in May, higher than expected and up from April’s reading of 56.0. A reading above 50 indicates expansion in the service sector, a diverse group of industries that represents about 80 percent of U.S. economic activity. Investors want to see growth but worry that if it’s too robust, it could prompt a rate hike.

The Dow fell 80.86, or 0.59 percent, to 13,595.46, after earlier falling more than 100 points.

Broader indexes also retreated. The Standard & Poor’s 500 index fell 8.23, or 0.53 percent, to 1,530.95, while the Nasdaq composite index shed 7.06, or 0.27 percent, to 2,611.23.

Before Tuesday’s decline, the Dow and the S&P 500 had risen more than 8 percent since the beginning of the year.

Bonds slipped after Bernanke’s comments and the strong service sector data.

“The good news is he did say this residential real-estate morass won’t leach out into the main economy. The bad news is he’s still beating the drum pretty hawkishly on inflation,” said Jack Ablin, chief investment officer at Harris Private Bank.

The yield on the benchmark 10-year Treasury note rose to 4.98 percent from 4.93 percent late Monday. The 10-year yield is trading at 9-month highs, and appears poised to break through 5 percent, a level not reached since August 2006.

Declining issues outnumbered advancers by about 3 to 1 on the New York Stock Exchange, where volume came to 1.51 billion shares, compared to 1.34 billion on Monday.

The Russell 2000 index of smaller companies was down 6.84, or 0.80 percent, at 848.25.

Crude oil futures for July delivery fell 60 cents to $65.61 a barrel on the New York Mercantile Exchange.

Overseas, China’s benchmark Shanghai Composite Index rebounded 2.6 percent after plummeting 8.3 percent a day earlier. Japan’s Nikkei 225 index rose 0.45 percent. Britain’s FTSE 100 fell 0.47 percent, Germany’s DAX index dropped 0.71 percent, and France’s CAC-40 decreased 0.77 percent.

Thoughts and opinions on this story? Click here to comment >>

Get stories like this in a free daily email