Inflation Fears Weigh Down Stocks Again

Wall Street finished its worst week of the year with a moderate decline Friday as persistent unease over inflation and interest rates kept investors nervous about buying.

Stocks had appeared to steady themselves in morning trading Friday after several days of heavy losses. But a jump in import prices and increased demand for foreign-made products renewed the market’s inflation jitters and sent stocks sliding by midday.

Since the Federal Reserve said in early May that more interest rate hikes could be needed to counter inflation, investors have been increasingly unwilling to place bets and bid stocks higher. The Dow Jones industrial average shed more than 355 points this week and is off 6.5% from a six-year high of 11,642.98, reached May 10.

Analysts say Wall Street’s pullback has been exacerbated by traders repositioning their holdings to account for the risk of rising interest rates and slowing economic growth. Although stocks have slumped, investors are still unsure where to put their money.

“I think we still have to push the risky asset values lower relative to safe assets because there’s been so much speculation that needs to be unwound,” said Jack Ablin, chief investment officer of Harris Private Bank.

He added that the afternoon retreat was an ominous sign of more losses in the coming sessions.

The Dow ended the session with a decline of 46.90 points, or 0.4%, to 10,891.92 after having been up 37 points earlier in the day.

Broader stock indicators also declined. The Standard & Poor’s 500 index fell 5.63 points, or 0.4%, to 1,252.30, and the Nasdaq composite index lost 10.26 points, or 0.5%, to 2,135.06.

Declining issues outnumbered gainers by about 7 to 6 on the New York Stock Exchange.

The major indexes finished a nervous week with steep losses, saddled by concerns that rising interest rates would slow demand and hinder the global economy. For the week, the Dow dropped 3.2%, the S&P; 500 sank 2.8% and Nasdaq plunged 3.8%.

Many foreign stock markets stabilized Friday after steep losses Thursday, when central banks in Europe, South Korea, Turkey and India tightened credit because of inflation concerns.

The German market gained 1.5%, Japan’s Nikkei 225 index added 0.8%, the South Korean market rose 1% and the Indian market rebounded 5.5%.

But the Mexican market sank for a fifth straight session, losing 2.8%.

For the week, the average foreign stock mutual fund plunged 6.4%, compared with a 3.4% decline for the average U.S. stock fund, according to Morningstar Inc. Year to date the average foreign fund is up 3.8% and the average U.S. fund is up 1.1%.

Bond yields were mixed, with the 10-year U.S. Treasury note slipping to 4.97% from 5% on Thursday. Short-term yields continued lingering above long-term rates, signaling greater expectations of slowing economic growth.

Crude futures gained amid political unrest in Iraq after the death of the country’s main terrorist leader, with a barrel of light crude up $1.28 to $71.63 in New York trading.

Although the Fed has been fixated on rising inflation, recent signs of economic weakness have investors fretting that the central bank might lift rates too high and derail the economy, said Jack Caffrey, equity strategist for JPMorgan Private Bank.

Next week’s reports on wholesale and consumer prices in May will provide the latest clues on the economy’s health and could spark more investor debate about the battle between economic growth and inflation.

Also Friday:

* The Commerce Department said the nation’s trade gap widened by $1.5 billion to $63.4 billion in April amid higher oil prices and a flood of furniture, computers and toys from China.

* Texas Instruments raised its earnings and revenue targets for the second quarter, but attributed the gains to a legal settlement and a tax break. The company’s stock dropped $1.04 to $29.68.

* Intel rose 5 cents to $17.16 for its first gain this week. The maker of computer chips said it would speed up production of a new microprocessor for server computers, making it available in the third quarter instead of the fourth.

Times staff writer Tom Petruno contributed to this report.