Inflation Worries Drag on Stocks, Boost Bond Yields

Investors preoccupied with inflation extended Wall Street’s decline Friday, driving stocks mostly lower and pushing bond yields higher in response to a ballooning U.S. trade deficit.

The market’s drop, which came in spite of an upbeat sales outlook from computer chip giant Intel, left the major indexes substantially lower for the week.

The Dow Jones industrial average slid 77.15 points, or 0.7%, to 10,774.36 on Friday and slumped 1.5% for the week.

Wall Street was unnerved as the Commerce Department reported that the trade deficit widened to $58.3 billion in January, the second-highest level after November’s record reading.

Although the nation’s exports rose to record highs, imports rose even faster, leading investors to fear a further loss of confidence in the dollar overseas.

The euro rose to a fresh nine-week high of $1.346 from $1.342 on Thursday. The dollar also fell against the yen, to 103.88 from 104.02.

A continuing decline in the buck could boost inflation pressures by raising the cost of imported goods.

Another jump in oil prices Friday also stoked inflation concerns. Near-term oil futures in New York settled at $54.43 a barrel, up 89 cents. For the week, the price rose 65 cents.

Treasury bond yields surged as investors focused on inflation risks. The yield on the 10-year Treasury note rose to an eight-month high of 4.54% from 4.47% on Thursday and was up from 4.31% a week ago.

The trade deficit report sapped any momentum the stock market might have gained from Intel, which reported late Thursday that sales for the current quarter would be at the higher end of previous forecasts. That bodes well for the tech sector and the overall economy, but inflation fears overshadowed the news, analysts said.

“Consumers are spending money,” noted Scott Wren, equity strategist at A.G. Edwards & Sons. “But with this trade deficit thing, the dollar and oil where they are, the market’s going to need a little more convincing.”

Among broader indexes, the Standard & Poor’s 500 was down 9.17 points, or 0.8%, to 1,200.08, and the Nasdaq composite lost 18.12 points, or 0.9%, to 2,041.60.

Losers outnumbered winners by about 3 to 2 on the New York Stock Exchange.

For the week, the S&P; 500 fell 1.8% and Nasdaq lost 1.4%.

“Oil prices are still hovering around their highs; the dollar continues to move lower -- those are two factors that the market isn’t buying right now,” said Peter Cardillo, chief strategist at S.W. Bach & Co.

“So as we’ve seen with Intel, any good news we happen to get will be discounted while we figure out inflation.”

Among Friday’s market highlights:

* After early gains, tech stocks fell along with the rest of the market. Intel slid 65 cents to $24.20, while rivals Advanced Micro Devices fell 66 cents to $16.36 and National Semiconductor, which issued a positive earnings report during Thursday’s session, lost 30 cents to $20.82.

PMC-Sierra, which makes chips for telecommunications switches and routers, lost 52 cents to $9.47. Its 5.2% drop was the steepest in the S&P; 500.

* Financial shares as a group were broadly lower as bond yields rose. Morgan Stanley fell $1.49 to $58.49, Citigroup declined 36 cents to $47.79 and American International Group retreated $1.41 to $64.71.

Real estate investment trust shares also suffered. A Bloomberg News index of 150 REIT stocks fell 1.3%.

* Energy stocks recovered some of their losses from the last four days, advancing 0.7%, on average. Exxon Mobil added 68 cents to $61.05. Transocean, the largest offshore oil driller, gained 86 cents to $48.43.

* Kmart Holding surged $14.89 to $127, reaching a new high on a bullish report from UBS. Merger partner Sears Roebuck added $4.20 to $57.56.

* Gold futures prices climbed to their highest level since early December, benefiting as an alternative to the sliding dollar. Near-term futures rose $3.40 to $446.20 an ounce in New York.

Gold mining stocks were mixed. Barrick Gold added 24 cents to $25.80, but Newmont Mining eased 6 cents to $45.68.