US blue chips drop on rate rise fears, Nasdaq ends up

US blue chips drop on rate rise fears, Nasdaq ends up
REUTERS

NEW YORK, APRIL 29: US blue-chip stocks dropped on Friday amid fears that interest rates will be jacked up, threatening to curb earnings growth in traditional sectors such as banking and retail.

A recent series of government figures showing the US economy is growing strongly and creating pressures that could lead to an acceleration in inflation have raised expectations that the Federal Reserve will raise interest rates over the next few months.

Shares in technology companies continued to rise as they are seen being less susceptible to higher borrowing costs as their growth prospects are higher and they tend to have less debt. "The Dow Jones industrial average is under pressure from the higher interest-rate environment and the anticipation of a Federal Reserve move," said Tony Dwyer, Chief market strategist at Kirlin Holdings. "The Nasdaq is higher on semiconductor-related stocks because of their huge earnings growth."

Among the Financial issues to drop were American Express Co, which lost 5 at 150, JP Morgan & Co, down 3 at 128-3/8 and Citigroup Inc, off 2-1/8 at 59-7/16. Leading home improvements retailer Home Depot, fell 2-3/4to 56-1/16 and the world's biggest retailer Wal-Mart Stores Inc., which dropped 2-1/8 to 55-3/8.

Higher interest rates tend to reduce the demand for credit, which can hurt the Financial sector's earnings growth. They can also reduce consumer, which can reduce sales growth in the retail area. Intel Corp, the world's largest computer chip maker, rose1-1/2 to 126-13/16 after the company on Thursday held a bullish meeting with analysts.

Semiconductor shares on the whole were gaining, with the Philadelphia Stock Exchange's semiconductor index, up 3.22 per cent. "It is kind of like musical chairs," said Mike Feeney, editor at independent research firm Wall Street Strategies. "Now the word on the Street is that technology will be able to grow at a greater pace than inflation. They are viewed as less interest-rate sensitive than financials or cyclicals, which people are rotating out of."

Another big Dow loser was drugmaker Merck & Co, which lost3-1/16 to 68-7/16, after analysts told Reuters they were concerned that a study had cast some doubt on the safety of the company's blockbuster arthritis drug Vioxx. The Standard & Poor's 500 index dropped 12.49 points, or 0.85 per cent, to 1,452.43.

A report that personal income and spending in March were nearly in line with forecasts was not expected to have much of an effect on stocks as the data confirmed that the US economy is still whistling along at a quick pace.

"It just says that things are ripping along," said Harvey Hirshhorn, Stein Roe and Farnham chief economist and investment strategist. "Consumers still have great momentum going."

"The futures are looking pretty good," said Thom Brown, managing director of Rutherford Brown and Catherwood. "There was an impressive turnaround in the Nasdaq yesterday. I think we will get a firmer tone."

The Commerce Department said March personal income rose 0.7 percent while spending notched up 0.5 percent -- the smallest increase in consumption since July 1999. Economists polled by Reuters had been forecasting a 0.6 percent boost in both figures.

But personal spending in February was revised to reflect agreater-than-expected consumption spree, up 1.4 percent compared with the 1.0 percent reported earlier. "There seems to be some firming in the futures," said Larry Wachtel of Prudential Securities. "That good action from yesterday is carrying over. But it is Friday so it could trail off in the end."

Thursday's news of surprisingly sharp rises in first-quarter Gross Domestic Product's (GDP) price deflator, a wide gauge of price pressures in the economy, and the Employment Cost Index (ECI), a barometer of labour costs, sparked an early sell-off.

But concerns that the Federal Reserve would hike interest rates by more than a quarter of a percentage point in order to ward off inflation ended up hurting old economy stocks than new economy technology stocks. The Fed meets next on May 16 with the central bank already having raised borrowing five times since June of last year.