Dow Drops 26.70 on Inflation Worries

Highlights of Wednesday’s market activity, compiled from Times staff and wire reports:

* The stock market suffered another broad setback after taking its sharpest drop in two months Tuesday. The Dow Jones average fell 26.70 points to 3,343.22. It lost 34.21 points Tuesday.

* Cocoa futures prices slumped to their lowest level in two decades, depressed by swollen inventories and the prospect of even more beans coming to market.

Stocks

An indication of the breadth of the stocks selloff was the fact that declining issues outnumbered advances by almost 2 to 1 on the New York Stock Exchange.

Big Board volume was an estimated 210.75 million shares, up from 191.71 million the previous session.

Some observers attribute the market’s slide to worries that inflationary pressures may be resuming, deterring the Federal Reserve from easing credit conditions. Interest rates were mostly higher in credit markets Wednesday.

Government reports are due out today and Friday on May’s producer price index of finished goods and the same month’s consumer price index. Economists estimate that both measures of inflation increased about 0.3% last month after rising 0.2% in April.

A different view of the market’s drop is that it resulted from concern that stock prices were too high. Analysts taking this tack believe that a “correction,” or temporary pullback, was necessary to restore equilibrium.

Among the market highlights:

* Blue chip losers included Philip Morris, down 1 7/8 to 72 1/4; Aluminum Co. of America, down 1 1/8 to 76 5/8; International Business Machines, down 1/2 to 90 1/8; J. P. Morgan, down 1 to 55 1/2, and Procter & Gamble, down 1 1/8 to 99 3/8.

* Warner-Lambert fell 1 1/8 to 59 1/8, even though it said it expects a 13% increase in earnings per share for the second quarter.

* Other health care stocks continued to struggle under the pressure of recent earnings disappointments in the industry. Bristol-Myers Squibb dropped 1 5/8 to 62 7/8, Abbott Laboratories 5/8 to 27 1/8, Merck 3/4 to 48 and Syntex 1/8 to 35. Bristol-Myers has traded this year as high as 90 1/8 and Abbott as high as 34 3/4.

* The prospect of a market downturn weighed on securities stocks. Merrill Lynch fell 5/8 to 44 3/4, Morgan Stanley 1 7/8 to 48 7/8, PaineWebber 3/4 to 19 1/4 and Charles Schwab 3/4 to 25.

* Airline issues showed broad losses. AMR dropped 1 1/2 to 63 1/8, UAL 2 to 115 7/8, Delta Air Lines 1 3/8 to 57 1/4 and USAir Group 1/8 to 12 3/8.

* Northern Telecom fell 2 7/8 to 36 5/8. It said it was likely to post lower second-quarter revenue.

* MNC Financial bucked the downtrend, climbing 1 1/4 to 12 1/4. The Washington Post said three other bank holding companies have scrutinized MNC as a possible takeover candidate.

* Technology Solutions, traded in the NASDAQ over-the-counter market, dropped 5 1/2 to 14 1/2. The company said it expects to take a write-off in fiscal 1992 for receivables and contracts in process.

Overseas, many investors in Tokyo stayed on the sidelines ahead of two events Friday--a futures settlement and release of a Bank of Japan quarterly economic report. The 225-share Nikkei average fell 102.17 points to 17,742.87.

In Frankfurt, the 30-share DAX index rose 3.50 points to 1,789.76. In London, the Financial Times 100-stock index was little changed, rising 0.7 points to 2,636.1.

Credit

Bond prices were mostly lower in light trading as investors waited for inflation reports.

The Treasury’s key 30-year issue was off 7/32 point, or $2.19 per $1,000 in face amount. Its yield, which rises when the price falls, rose to 7.90% from 7.88% Tuesday.

Many traders have been in a holding pattern since Friday, when the Labor Department reported an unexpectedly strong increase in the May unemployment rate--to 7.5%.

The weakness suggested that the Federal Reserve could loosen credit to stimulate the economy. But other recent data has pointed to a strengthening economy, which diminishes chances of a Fed ease.

The bond market typically rallies on economic decline and falls on economic improvement.

The federal funds rate, the interest on overnight loans between banks, rose to 4.5% from 3.0% Tuesday.

Currency

The dollar settled mostly higher in technically driven trading.

The greenback rose at the expense of the German mark, which came under profit taking after a week of steady gains. The mark has drawn repeated support from Denmark’s rejection of the Maastricht treaty for European political and economic union.

“Some of the concerns over (European) monetary union have dissipated,” said Earl Johnson, a vice president at Harris Trust & Savings Bank in Chicago.

The dollar rose in New York to 1.5925 marks from 1.5915 Tuesday. It climbed to 127.55 Japanese yen from 127.50.

It cost $1.8340 to buy a British pound, less than Tuesday’s $1.8345.

Commodities

Cocoa for delivery in July fell $36 a ton to $802 on the Coffee, Sugar & Cocoa Exchange in New York.

“There are very few things you can buy at 1970s prices, but cocoa is one of them,” said Hari Schwartz, an analyst at Cargill Investor Services Inc.

The result is continuing selling by the Ivory Coast, the world’s top cocoa producer.

In energy markets, light, sweet crude oil for July delivery settled 19 cents higher at $22.51 a barrel on the New York Mercantile Exchange.

Precious metals futures were mixed on the Commodity Exchange in New York. Gold for June delivery slipped 40 cents to $337.90 an ounce. June silver rose 1.1 cents to $4.052.

Market Roundup, D8