Wall Street finished a wobbly session flat today as stubbornly high bond yields discouraged investors from buying back into the stock market.
The yield on the Treasury’s 10-year note rose to 5.15%, up from 5.11% on Friday.
Last week, investors took signs of stubborn inflation to mean a rate cut by the Federal Reserve was unlikely, and they sent stock and bond prices tumbling; since yields move in the opposite direction from bond prices, market interest rates soared.
The 10-year Treasury yield climbed above 5% for the first time since last summer.
The Fed has kept the federal funds rate, the interest banks charge each other for overnight loans, unchanged at 5.25% since last summer, following a string of increases over about two years.
“I don’t think that there is a lot of clarity as to monetary policy for the rest of 2007 and I think that in general puts markets on edge,” said Les Satlow, portfolio manager at Cabot Money Management. “I think it’s a reflection of institutional ambivalence,” he said of the back-and-forth direction of stocks.
The Dow Jones industrial average rose 0.57, or less than 0.01%, to end at 13,424.96, capping a day of trading that saw stocks slip, advance, and then pull back again.
Broader stock indicators were narrowly mixed. The Standard & Poor’s 500 index rose 1.45, or 0.10%, to 1,509.12, and the Nasdaq composite index fell 1.39, or 0.05%, to close at 2,572.15.
Oil prices, which also caused inflation concerns last week, rebounded today after falling sharply on Friday. Iran's oil minister said today that the Organisation of Petroleum Exporting Countries did not plan to release more oil into the market ahead of its next policy meeting in September. Light, sweet crude rose 1.21 to 65.97 per barrel on the New York Mercantile Exchange.
Amid an absence of economic and earnings reports, investors will probably focus on moves of the bond market and individual stocks as they await data on inflation due later in the week. On Thursday, the Labour Department releases its producer price index and on Friday the consumer price index is due.
“The weakness in the bond market is a real concern for equity investors. We have been discussing for several weeks the possibility of a near-term equity market correction being triggered by technical factors. Higher bond yields now also provide a fundamental reason for investors to be wary over the short-term,” wrote Bob Doll, BlackRock’s global chief investment officer of equities, in a research note.
The Fed’s message on inflation has been that it remains too high and that holding down rising prices remains its focus.
Cleveland Fed President Sandra Pianalto, speaking in Germany today, said US inflation remained higher than the Fed would like and that spikes in prices, liquidity crises or fiscal imbalances could upend central banks’ notions of how contained inflation might be.
In corporate news, Steel maker Nucor warned its second-quarter profit will fall because customers had increased orders in the first quarter ahead of an expected increase in prices, making for lower orders in the second quarter. Nucor fell 3.95, or 5.9%, to 62.66. Other steel makers fell as German steel company ThyssenKrupp denied it was in talks to acquire rival US Steel, which fell 8.85, or 7%, to 116.20.
Homebuilder stocks fell at the prospect that rising interest rates would drive up the cost of buying a home. Hovnanian Enterprises fell 56 cents, or 2.6%, to 21.24 and set a fresh 52-week low of 20.95; previously the low was 21.02. Toll Brothers fell 52 cents to 27.62.
The flow of dealmaking that has helped prop up stocks in the absence of compelling economic or earnings data continued, but at a slower pace Monday than in recent months. Rexam fell 79 cents to 49.40 after the British company agreed to acquire the plastic packaging business of Owens-Illinois for nearly 1.83 billion. O-I slipped 62 cents to 32.65.
Biotech drug maker Medivation soared 3.62, or 22%, to 19.80 after the company said its Alzheimer’s drug Dimebon showed favourable results.
Bearingpoint fell 17 cents, or 2.2%, to 7.43, after a Jefferies analyst lowered his rating on the management and technology consulting company citing increased competition and lower demand in the sector.
The dollar was higher against most other major currencies, and gold prices also rose.
Advancing issues just barely outnumbered decliners on the New York Stock Exchange, where volume totalled 1.32 billion shares.
The Russell 2000 index of smaller companies fell 2.13, or 0.25%, to 833.18.