Rally Ends on Inflation, Interest Rate Worries
Stocks fell Wednesday after three days of gains as investors digested the idea that interest rates might rise significantly more than expected when the Federal Reserve meets later this month.
Oil prices seemed to be stabilizing after reaching 21-year highs in recent weeks, but inflation worries remained. Some investors may be taking a cautious approach ahead of the Labor Department’s monthly report on wholesale prices, an important inflation gauge.
The producer price index, which measures prices of goods before they hit store shelves, will be released today, a day earlier than scheduled, because U.S. government offices and most financial markets will be closed Friday in observance of former President Reagan’s death. Volume was light, as it has been for the last several weeks.
“It just seems like the start of the summer doldrums,” said Neil Massa, an equity trader at John Hancock Funds. “I think once the end of the month comes, we can start to move forward. Until then we’ll be trading sideways.”
The Dow Jones industrial average declined 48.32 points, or 0.5%, to 10,384.20.
The broader gauges were also lower. The Nasdaq composite index fell 29.75 points, or 1.5%, to 1,993.78. The Standard & Poor’s 500 index was down 9.20 points, or 0.8%, at 1,132.98.
U.S. Treasury yields rose as the president of the Federal Reserve’s New York branch said policymakers “will do what is necessary” to keep inflation in check.
The comments from Timothy Geithner came one day after Fed Chairman Alan Greenspan said the central bank’s commitment to a “measured” pace of interest-rate increases could be revoked. Both remarks suggest that policymakers are prepared to raise interest rates at a faster pace than expected if necessary.
The yield on the benchmark 10-year Treasury note rose to 4.81%, up from 4.76% Tuesday and from a low this year of 3.65%. Yields have risen in anticipation of higher interest rates.
The dollar rose by 1.82% against the euro, the sharpest climb in two months, on speculation that faster inflation would lead the Federal Reserve to raise its key interest rate more than some traders had expected.
Crude oil prices initially fell after the U.S. government reported a rise in commercial fuel inventories. But they ended up 26 cents higher, at $37.54 a barrel, in what traders chalked up to speculative buying.
On Wall Street, experts said the prospect of higher interest rates was eroding the profit-growth outlook that had fueled a rally for the last three weeks.
“The fear is that we’re seeing an earnings deceleration,” said James Grefenstette, who manages the $750-million Federated Growth Strategies Fund in Pittsburgh. “That’s not typically good for the market.”
Among Wednesday’s market highlights:
* Dow component Coca-Cola was down 85 cents at $51.76. Steve Heyer, the company’s president and No. 2 executive, announced plans to step down after he was passed over for the top job.
* Fortune Brands fell 41 cents to $74.20 after the maker of products including Jim Beam bourbon, Titleist golf equipment and Moen faucets raised its forecast for the current quarter to the top range of analysts’ expectations.
* Smithfield Foods was down $1.16 at $29.05 after the nation’s largest hog producer and pork processor reported sharply higher quarterly earnings, largely due to expanded operations and rising prices.
* National Semiconductor slid $1.20 to $21.15. The Philadelphia Semiconductor Index dropped 3.2%, as all 18 members fell.
* Verizon and SBC Communications advanced. The Justice Department won’t ask the Supreme Court to reverse a lower court’s ruling to end discounted access to local-telephone companies’ networks for AT&T; and other carriers.
Verizon rose 31 cents to $35.86, and SBC Communications added 28 cents to $24.62.
* Tommy Hilfiger fell $1.51, or 9.7%, to $13.99. The clothing maker cut its first-quarter and annual forecasts, citing a bigger-than-expected drop in sales.
Decliners outnumbered advancing shares almost 3 to 1 on the New York Stock Exchange.
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Market Roundup, C5
