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Markets ignore rates, warning

Investors suggest corporate profits can overcome the Fed's expected interest rate increase today.

Stocks rose on the eve of the Federal Reserve interest rate announcement despite a manufacturing group's warning that "prices are rising to levels of concern."

The Dow Jones Industrial Average rose 100.52 to close at 11,041.05, building on its 201-point gain on Monday. The Nasdaq Composite Index rose 111.63 to 4,051.98, its sharpest point gain since Jan. 7. The Standard & Poor's 500 rose 14.82 to 1,409.28.

After slumping for much of the morning, stocks rose amid a growing sense that despite rising interest rates, which can cut into corporate profits, many U.S. companies will be able to extend their strong profit performances from 1999 well into 2000.

The Federal Reserve is expected to announce today a quarter-percentage point increase in short-term interest rates. The Fed raised interest rates three times in 1999 to keep inflation under control, and many economists expect at least three more increases this year unless the economy begins to demonstrate evidence of a slowdown.

The latest suggestion that higher rates are on the way came Tuesday from the National Association of Purchasing Management, which said in its monthly survey that manufacturing activity continues to grow as the price of raw materials is escalating. The figures confirmed that the current economic expansion _ already the longest in American history _ is continuing.

The purchasing executives' group said that its manufacturing index, based on a national survey of executives who buy raw materials and other supplies for industry, registered 56.3 percent in January, down slightly from a revised 56.8 percent in December but a bit stronger than the 56 percent analysts had expected. A reading above 50 percent indicates growth.

The index is watched closely because it is the first national reading for January on U.S. industrial performance, a key sector of the economy.

Meanwhile, the index component measuring prices factories pay for raw materials surged in January to 72.6 percent from a revised 68.3 percent the month before. That reading was the highest since April 1995, when the price index hit 74.5 percent, economists for the association said.

"The manufacturing sector appears to have momentum, but prices are rising to levels of concern, particularly with a new round of petroleum price increases," said Norbert J. Ore, head of the group's business survey committee.

Gary R. Thayer, chief economist at A.G. Edwards & Sons Inc. in St. Louis, said the rise in the price index reflected surging fuel costs as members of the Organization of Petroleum Exporting Countries hold down production.

Thayer said the increases haven't spilled over to other industrial commodity prices and added that the current competitive pricing environment also made it difficult for manufacturers to pass the costs through to consumers. However, "I don't think the Fed can exclude OPEC and say we don't have a problem and do nothing. They have to be alert to the fact that energy prices could spill over."

David Orr, chief economist at First Union Corp. in Charlotte, N.C., characterized the high price index reading as "the danger zone," noting: "The last two times it was above 70 percent _ in 1994-95 and 1987-88 _ correlated with aggressive Fed tightening" of credit.

Still, Orr said he expected Federal Reserve policymakers to raise interest rates just a quarter of a percentage point _ not the half a point that some have predicted.

"From a Machiavellian point of view, I think they would like to keep the stock market off guard," Orr said. "Moving the rate a bit at a time, that keeps the market off guard."

Markets were uneasy as traders waited for the Fed's decision, but investors bet that even a significant spike in borrowing costs won't stop U.S. companies from posting strong profit growth. Technology stocks such as Cisco Systems, Qualcomm and Microsoft were notable winners Tuesday.

Strong corporate earnings in more traditional companies also provided some spark to the market. Tricon Global Restaurants, which operates the Pizza Hut, KFC and Taco Bell chains, rose $2.12{ to $30.75 after saying it expects to substantially exceed analysts' earnings estimates for the fourth quarter and the year. Also gaining were General Motors, up $4.68} to $85.25, and Wal-Mart, up $3.93} to $58.68}.

In related news:

The Commerce Department reported Tuesday that construction spending surged 2 percent in December to an all-time high, pushing the amount of money spent on building single-family homes to a monthly record.

The department said spending rose to a record seasonally adjusted annual rate of $730.3-billion. That followed a revised 2 percent increase in November, helped out by better-than-usual weather.

December's performance was much stronger than many analysts expected. They had predicted a 0.3 percent decline. For the year, construction spending rose 6 percent, following an increase of 7.6 percent in 1998.

The Senate Banking Committee on Tuesday approved Alan Greenspan's nomination to a fourth term as chairman of the Federal Reserve.

During his confirmation hearing last week, Greenspan was widely praised by Sen. Phil Gramm, R-Texas, and other members of the committee for his handling of monetary policy over the past 12 years.

President Clinton's nomination of Greenspan is expected to win quick approval in the Senate later this week. Senate Majority Leader Trent Lott indicated that the nomination would likely be taken up by the full Senate on Thursday.

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