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The Honolulu Advertiser

Posted at 11:29 a.m., Wednesday, May 3, 2006

Interest rate fears saddle stocks

Associated Press

NEW YORK — Stocks closed modestly lower today as the latest batch of upbeat economic data made investors uneasy about more interest rate hikes by the Federal Reserve.

Disappointment over blue chip Procter & Gamble Co.'s lower-than-forecast revenue saddled the Dow Jones industrial average and countered solid earnings from Qwest Communications International Inc. and an improved outlook at Qualcomm Inc., as well as a retreat in oil prices.

An unexpected jump in service sector growth extended the recent string of data showing the economy expanding at a brisk pace, with a sharp upswing in factory orders also brightening that picture. However, the gains again had the market concerned about rising interest rates as the Fed continues its fight against inflation.

Russ Koesterich, senior portfolio manager at Barclays Global Investments, said the persistently high level of oil prices is putting pressure on consumer spending, and he added that rising Treasury yields also created some headwind for stocks.

"The inflationary pressures are building, albeit slowly," Koesterich said. "What we haven't seen so far is commodities strength, particularly in energy, filter into core inflation. But the fear is that it's going to happen soon."

At the close, the Dow was off 16.17, or 0.14 percent, at 11,400.28, after losing as much as 54 points intraday. Yesterday, the Dow finished at 11,416.45, its best close since Jan. 19, 2000.

Broader stock indicators also drooped. The Standard & Poor's 500 index slid 5.36, or 0.41 percent, to 1,307.85, and the Nasdaq composite index dropped 5.87, or 0.25 percent to 2,303.97.

Oil and gasoline futures tumbled following a government report that gasoline demand has been flat over the past month, and that fuel supplies are growing as refineries step up output. But crude oil still lingered near record highs as the market fretted about political tension in Nigeria and Iran leading to potential supply cutoffs.

A barrel of light crude slumped $2.33 to settle at $72.28 on the New York Mercantile Exchange, where gasoline dropped 8.9 cents to $2.086 per gallon.

The threat of rising interest rates dragged on bonds, with the yield on the 10-year Treasury note climbing to 5.14 percent from 5.11 percent late yesterday. The dollar rebounded slightly against other major currencies, and gold prices sat near $670 per ounce.

Ken McCarthy, chief economist for vFinance Investments, said bond weakness could persist as traders remain unsettled about Fed Chairman Ben Bernanke's stance on inflation. But despite today's decline, McCarthy said he is positive about the market's underlying strength.

"The market's fundamentals today are very supportive," he said. "I think all it's going to take is some positive news on inflation," which could come in today's report on first-quarter worker productivity.

In economic news, the Institute for Supply Management's April services index gained 2.5 points to 63, while economists forecast a 0.9 slide. The Commerce Department said factory orders bounced back to grow 4.2 percent in March, up from a 0.4 percent increase the month before; economists were looking for a 3.7 percent rise.

Consumer products maker P&G said strong sales and the acquisition of its Gillette razor business helped its profit swell 37 percent last quarter, but its revenue missed Wall Street targets. P&G fell $1.89 to $56.22.

Qwest posted a 54 percent jump in quarterly profit amid higher sales and better cost control. Qwest nonetheless fell 11 cents to $6.88.

Qualcomm raised its third-quarter outlook, citing stronger-than-expected orders for its communications chips. Qualcomm added 69 cents to $51.75.

Microsoft Corp. slid 84 cents to a new 52-week low of $23.17 following a Wall Street Journal report that the software giant may buy a stake in Internet company Yahoo Inc., which gained 32 cents to $32.17.

Time Warner Inc.'s quarterly profit surged 60 percent, lifted by growth in cable television and from the sale of its book group. Those gains countered declines at AOL and Time Inc. Time Warner fell 20 cents to $17.22.

Warner Music Group Corp. rose 71 cents to $28 after saying it refused a $4.2 billion offer from rival label EMI Group PLC. The companies held merger talks in 2000 and again in 2003, but no deal surfaced either time.

Declining issues led advancers by about 9 to 7 the New York Stock Exchange, where volume of 1.75 billion shares topped the 1.73 billion shares changing hands at the same point yesterday.

The Russell 2000 index of smaller companies rose 0.12, or 0.02 percent, to 767.73.

Japan's stock markets were closed for the rest of the week for national holidays. Britain's FTSE 100 lost 1.19 percent, Germany's DAX index plunged 1.36 percent and France's CAC-40 was lower by 0.9 percent.