Sun, Jul 04, 2004 - Page 10 News List

Wall Street looks for something new to worry about

AFP , NEW YORK

After taking in stride the transition of power in Iraq and the first Federal Reserve rate hike in four years, Wall Street has found a new worry: an apparent cooling trend in the US economy.

The market was broadly lower over the past week. The blue-chip Dow Jones Industrial Average fell 0.86 percent to 10,282.83 in the week to Friday while the broad-market Standard & Poor's 500 shed 0.80 percent to 1,125.38.

The tech-heavy NASDAQ composite retreated 0.92 percent for the week to end at 2,006.66.

The market was unscathed by the key events of the past week, namely the transition of power in Iraq -- advanced two days for security reasons -- and the quarter-point rate hike that had been "telegraphed" by the Federal Reserve.

The Fed appeared to calm markets by repeating that any future rate hikes are likely to be "measured" -- a code-word viewed on Wall Street as quarter-point increments.

But while some depicted the move to boost rates as a sign of a strong economy, news on that front took a turn for the worse over the past week, surprising many on Wall Street.

"This week's economic reports show the economy clearly slowing in June," said Wachovia chief economist John Silvia.

"Nearly all of this week's reports came in weaker than expected."

Most troubling was Friday's employment report that showed a far weaker-than-expected 112,000 jobs created in June -- a sharp slowdown from prior months and below the pace needed to sustain robust economic growth.

"It's not just the employment number itself, but the hours and real income growth were negative last month and there is little if any momentum on the wage or production front as we enter the third quarter," David Rosenberg said, chief North American economist at Merrill Lynch.

Rosenberg said the slowdown comes at the same time some of stimulus of tax cuts and low rates is wearing off, a potentially ominous sign that could keep the Federal Reserve cautious as it moves on rates.

He said weak retail spending and auto sales along with other data could pull economic growth as low as 2.5 percent for second quarter, from 3.9 percent.

"All we have to look forward to is a loss of both monetary and fiscal stimulus in coming months," he said. "This may sound like heresy, but why would the Fed be tightening in this environment?"

Ethan Harris at Lehman Brothers said the economy has enough strength to sustain its pace despite some pockets of weakness.

"We do not buy the slowdown argument on either theoretical or empirical grounds," he said.

Looking ahead, Bank of America chief economist Lynn Reaser said stocks could get a lift from second quarter earnings, which start coming in over the coming week.

Bonds rallied as the Fed's statement and weak economic data raised hopes for easy money to continue a bit longer.

The yield on the 10-year US Treasury bond fell to 4.458 percent from 4.646 percent a week earlier and that on the 30-year bond dropped to 5.207 percent from 5.338 percent. Bond yields and prices move in opposite directions.

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