Stocks: Bank Stocks Fall as New Data Stoke Fears of Another Rate Hike

Bank stocks fell along with other corporate issues Thursday after a series of economic reports rekindled fears of inflation and higher interest rates.

The Standard & Poor's bank stock index fell 1.7%, to 669.57, and the Dow Jones industrial average dropped 1.7%, to 10,791.29.

One report by the Commerce Department particularly unnerved investors: The employee cost index rose 1.1% in the second quarter, surpassing expectations of 0.8%.

The news renewed speculation that the Federal Open Market Committee will raise interest rates again when it meets in August.

"This might be the evidence (Federal Reserve Chairman) Alan Greenspan needs to justify another hike in interest rates," said Sung Won Sohn, senior vice president and chief economist of Wells Fargo & Co.

Almost all bank stocks headed south. Citigroup Inc. fell $1.625, to $45.75; Chase Manhattan Corp. $2.6875, to $80.25; and Bank of America Corp. $1.625, to $68.375.

J.P. Morgan & Co. dropped $3.375, to $130.625, and Bank One Corp. $1.6875, to $55.6875.

Shares of First Union Corp. avoided the downdraft. Its stock price rose $1.125, to $48, on a day when news reports circulated about an unscheduled board meeting and possible management changes. (See article on page one.)

The Commerce Department, meanwhile, said the gross domestic product grew at an annual rate of 2.3% in the second quarter, which was less than the 3% to 4% of recent quarters.

But L. Douglas Lee, chief economist at Washington Analysis, said inventories have been stretched to their lows, requiring businesses to beef up orders in coming months. Also, he said, industrial and consumer investment outpaced gross domestic product growth by $40 billion in the second quarter, suggesting a potential "bounce-back" for the third quarter.

"The economy may be slowing," Mr. Lee said. "But it is not all that convincing. Inflation pressures could be getting worse."

Mr. Lee said Japan's industrial production for June rose 3%, adding more evidence to a "synchronized" global expansion that "is not positive for the U.S. inflation perspective."

Add to that the accelerating economies in Malaysia, Singapore, and most countries in Europe, and the United States will have a tougher time snatching up commodities at bargain-basement prices.

"These economies are on the mend and accelerating," said David Littman, chief economist at Comerica Inc. in Auburn Hills, Mich. "It will be more difficult for us to draw on imports at the same low prices."

Mr. Greenspan noted in Capitol Hill testimony that he will be looking to see whether productivity is accelerating. Improved productivity has fueled much of the economic boom, but some wonder whether or how much longer that can continue.

"To get the acceleration in productivity gains, you have to make acceleration in investment," Mr. Sohn said. "How many computers can you buy? Can you really double your cable network overnight?"

"All these things will add to the nervousness over whether the Fed will raise interest rates" before yearend, Mr. Lee said.

With higher rates, net present values of future earnings decline, prompting investors to look for other places to park their money, said Henry C. Dixon, an analyst at Salomon Smith Barney, a Citigroup unit. And with interest rate increases, there lies the potential for eroding banks' credit quality.

Though banks didn't fall more than the average for corporate stocks on Thursday, they are lower on average this month. Since July 6, when the Standard & Poor's bank index reached 717.35, it has fallen 6.6%. The Dow has fallen 3% in the same period.

Thursday's selloff came despite solid second-quarter earnings reports by the banks.

"The market seems to be looking right through the fundamentals, which were excellent," said Phil Cuthbertson, head trader at Keefe, Bruyette & Woods Inc. in New York. Instead, investors are "focusing on a slowdown in revenues going forward."

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