Stocks closed lower Wednesday as bond yields surged despite fresh signs of tame inflation.
"Here we are right back into the fear and anxiety soup," said Bob Dickey, technical analyst at Dain Bosworth. Traders said speculation that the Federal Reserve Board might boost interest rates before a scheduled May 17 policy meeting shook the market's confidence.
Computer-guided program trading intensified the downturn in afternoon action on Wall Street, driving the Dow Jones industrial average deep enough into negative territory to trigger a collar restriction on certain activity. But, by the close, the blue chip indicator had recovered more than half of its loss to finish at 3,661.47, down 20.22.
Other market measures also ended down, but higher than their lows of the day.
In Mexico, political uncertainty and sharply higher interest rates sent the Bolsa index below the psychologically important 2,200 level it reached in November when the U.S. Senate approved the North American Free Trade Agreement.
Greg Nie, a Wall Street analyst with Kemper Securities in Chicago, said selling in the high-profile technology stock group on Tuesday carried over into Wednesday and contributed to broader-based selling.
Weakness in the technology group severely eroded the Nasdaq composite index, which plunged to nearly its lowest level of the year, to 727.38.
Initially, the bond market welcomed the Labor Department's report that the consumer price index rose 0.3% in March, meeting economists' advance estimates and matching the February increase. A separate Commerce Department report said retail sales rose 0.4% in March.
Taken together, the reports suggest that moderating economic growth continues to be accompanied by benign inflation.
But some bond traders used the bump in prices as an excuse to sell ahead of the industry production report to be released later this week, which is expected to show a sharp increase in March. Many analysts predict the figures will show U.S. factories running at a high level of capacity, a trend that could presage inflation pressures and knock bonds down further.
The widely watched 30-year Treasury bond was off 9/16 point, or $5.63 per $1,000 in face value. Its yield, which moves in the opposite direction, rose to 7.25% from 7.20% on Tuesday.
Among the trading highlights:
* Technology stocks featured prominently on the lists of active issues on all major exchanges for the second day. Among NYSE-listed issues, Motorola was unchanged at 95 1/2, IBM fell 1/2 to 52 3/8, Western Digital fell 1 to 15 1/4 and National Semiconductor fell 5/8 to 18 1/2, all in active trading.
* Also worrying Wall Streeters was the potential impact on corporations from holdings in complex investments known as "derivatives." The speculation grew out of news Tuesday that Procter & Gamble was setting aside money to close out two interest rate swap contracts. Banking stocks, in particular, suffered because analysts questioned the extent of banks' exposure to the risks. Procter & Gamble lost 1/8 at 53 3/4. Citicorp fell 1 1/8 to 38 3/8 in heavy NYSE volume. Bankers Trust's shares, meanwhile, lost 1 7/8 to 69 5/8.
* Woolworth, which rose 2 to 17 1/4, said its independent accountants confirmed that its results for the years ended Jan. 29, 1994, and Jan. 30, 1993, were correct. It had earlier announced suspected irregularities in those figures. The company also declared a regular quarterly dividend of 29 cents a share, which eased worries that the retailer was under financial strain.
In other markets:
* Trading overseas was mixed. Tokyo's market was buoyed by optimism about the political situation unfolding in Japan. Stocks lost ground in London and moved in varying directions in other major European financial centers.