FINANCIAL MARKETS : Inflation Fears Are Rekindled; Dow Falls 46.77

From Times Staff and Wire Reports

U.S. stocks sank Thursday amid renewed jitters about inflation and how that might affect future Federal Reserve Board interest rate increases.

But the bond market appeared to brush off stocks’ concerns, as yields rose only modestly.

Meanwhile, Latin American stock markets slumped again on doubts about the U.S.-led financial rescue proposed for Mexico.

On Wall Street, the Dow industrial average tumbled 46.77 points, or 1.2%, to 3,882.21, the biggest decline since Dec. 8 and a sharp reversal after the market’s rally of the past few weeks.


But the Dow’s loss was skewed by a plunge in shares of Caterpillar, which fell 3 7/8 to 54 3/4 on a disappointing quarterly earnings report.

In the broad market, most market indexes dropped half as much as the Dow, even though winners topped losers by nearly 2 to 1 on the New York Stock Exchange. Trading was active.

The catalyst for Wall Street’s selloff was a report that the Philadelphia Federal Reserve Bank’s index of prices paid by area businesses increased sharply this month from December, even as industrial activity slowed.

The report fanned fears that the Fed may raise short-term interest significantly later this month to guarantee an economic slowdown and thus combat inflation. Just last week, the stock market had rallied on hopes that growth was already slowing enough to erase the need for any additional Fed rate hikes.


“People seem to be getting a little more nervous over rates with the (economic) figures that have come out the last couple of days,” said George Pirrone, senior trader at Dreyfus Corp.

Inflation concerns also rose Thursday as the CRB index of key commodities hit its highest level since June.

The dollar also hurt the stock market Thursday: The buck sank to a 10-week low against the German mark after the government reported a higher U.S. trade deficit in November. The dollar fell to 1.515 marks in New York, down from 1.535 on Wednesday. It also slipped to 99.08 Japanese yen from 99.70.

But the bond market had a much easier day than stocks or the dollar. Short-term yields were mostly unchanged, and the 30-year Treasury bond yield inched up to 7.82% from 7.77%, a reaction that didn’t smack of severe inflation worries.


Elsewhere, Latin stock markets were hit by renewed selling. Mexico City’s Bolsa index sank 104.24 points, or 4.8%, to 2,051.89 as the peso weakened again, to 5.495 to the dollar from 5.405 on Wednesday. Traders anxiously monitored growing U.S. congressional opposition to granting Mexico $40 billion in loan guarantees.

In Brazil, the Bovespa stock index tumbled 2,691 points, or 6.6%, to 38,094, while Argentina’s Merval index fell 17.39 points, or 3.9%, to 430.80. Chile’s IPSA index fell 2.2%.

Among Thursday’s highlights:

* Fourth-quarter earnings reports by a number of big companies were not well-received by investors. General Electric, for example, fell 1 1/4 to 51 after saying fourth-quarter earnings rose to 99 cents a share from 84 cents a year ago. The results were a penny above analysts’ average expectations.


* Tech stocks were mixed. Intel jumped 1 5/16 to 70 11/16 after Nomura Securities upgraded the stock, but Microsoft lost 1 9/16 to 63 1/2 and IBM was off 3/4 to 76 1/2.

Another tech issue, Altera jumped 3 1/8 to 47 1/4. The company told analysts that orders for its computer products were strong in the latest quarter.

* Telmex shares on the NYSE fell 1 3/4 to 34 1/2 and Grupo Televisa fell 2 1/8 to 22 3/4.

* Herbalife International plunged 5 1/8 to 12 5/8 on the company’s forecast of sharply lower earnings, which blamed unexpectedly weak sales in Europe.


Elsewhere overseas, Japan’s Nikkei ended down 147.57 points at 19,075.74, while London’s Financial Times 100-share average fell 26.3 points to 3,028.6. Frankfurt’s 30-share DAX average rose 10.51 points to close at 2,089.36.