US interest rate fears worsen: Good economic news is ignored on Wall StreetFlat employment in Britain for 18 months predicted

AMERICAN investors are growing increasingly fearful that the Federal Reserve may be poised to begin pushing up interest rates.

Positive news on the US economy was yesterday overshadowed by worries that rates will rise over the next few months and share prices on Wall Street were pinned down.

The first economic data of 1994 was good, with the National Association of Purchasing Management's index showing that production growth surged in December to its best level for a year.

Nevertheless, the Dow Jones Industrial Average lost almost all its early gains and closed just 2.51 points higher at 3,756.6.

Evidence of a strengthening economy depressed bond prices, sending the yield on the 30 year treasury bond up to 6.4 per cent.

The purchasing manager's data backed up advice by Wall Street analysts for investors to move into cyclical stocks and sell interest rate sensitive issues such as utilities.

Salomon Brothers recently raised its earnings per share estimate by 4 per cent for stocks in the Standard & Poor's 500 index to take account of the improving economy.

Takeover situations are also seen as a potential area of investor interest for the coming year, and the market did not have to wait long for the first move of 1994 as Federated Department Stores bought up distressed debt of R H Macy.

However, while there were worries about interest rates in the US, there was renewed optimism among Continental investors for a fresh round of cuts across Europe.

Share prices on several European bourses hit highs as leading French high street banks trimmed interest rates by 0.2 points to 7.95 per cent - the lowest for 21 years.

Credit du Nord, Credit Lyonnais, Societe Generale and Banque Nationale de Paris said the reduction would take effect tomorrow. Their moves helped the CAC-40 share index in Paris to climb 22.34 points to a record 2,290.56.

Share price highs were also recorded in Zurich and Brussels, but interest rate optimism in Germany was tempered by economists predicting that the Bundesbank, which meets on Thursday, would have to hold rates until next month.

The positive move in France, however, could provide a fillip for the London market when it opens today. The bull run on the stock market showed signs of flagging on the last two trading days last week.

On Thurdsay the FT-SE 100 share index suffered its biggest one- day fall in six weeks, dropping 33.2 points to 3,428.8, and it lost another 10.4 points in the shortened trading session a day later on New Year's Eve.

French banks have been resisting reducing rates for a couple of months in an effort to recover from last year's currency crisis, during which the government pressured them not to raise finance charges even though money rates were lifted sharply to defend the franc.

Christiane Marcellier, analyst at NatWest Sellier, said: 'They did nothing during the period when the Bank of France last cut rates (October and December) . . . so they have been lagging the market.'

Despite the more cautionary tone in Germany, share prices did gain a little ground in Frankfurt yesterday. The DAX index firmed 1.3 points to 2,267.98.

German economists, although not entirely ruling out the chances of a rate cut, said the Bundesbank was constrained from making a move because M3 money supply growth probably remained high in December.

Forecasts for December M3 growth in Germany are pitched at an annualised 7 per cent compared with the fourth quarter of 1992. Although that would be below November's 7.2 per cent, it would still be above the Bundesbank's 1993 target range of 4.5 to 6.5 per cent.

Rainer Matthes, an economist at B Metzler Seel Sohn & Co, believes the Bundesbank will keep the repo rate at a fixed 6 per cent. 'But rates are certainly coming down and we expect the Bundesbank to ease again either at its 20 January meeting or the following one,' he said.