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The Honolulu Advertiser

Posted at 11:10 a.m., Wednesday, May 17, 2006

Stocks tumble on inflation fears

Associated Press

NEW YORK — Wall Street skidded lower today after an upswing in consumer prices intensified investors' fears that the Federal Reserve will extend its nearly two-year string of interest rate increases. The Dow Jones industrial average suffered its biggest one-day loss in three years, and the Nasdaq composite index turned negative for 2006.

Investors were spooked by a Labor Department report that its consumer price index swelled 0.6 percent in April, topping forecasts of 0.5 percent. But core CPI — without food and energy — also gained 0.3 percent, ahead of estimates and adding to worries that soaring oil prices have begun to lift prices elsewhere.

The inflation data dragged bonds lower and overshadowed solid earnings from Hewlett-Packard Co. and cooling oil prices. Wall Street has been extremely anxious about economic news after the Fed last week said more rate hikes could be needed to battle inflationary pressures from record commodities prices.

"The CPI data really kicked the market in the teeth today," said Ken Tower, chief market strategist for Schwab's CyberTrader. "So the question now really is where can we find some support?"

As the Dow came within 80 points of its best-ever close of 11,722.98 last week, many analysts felt the market was overbought and would soon see a correction. But Tower said stocks are now oversold after several days of steep losses, suggesting that investors may start looking for positive signs to spur buying.

According to preliminary calculations, the Dow sank 214.28, or 1.88 percent, to 11,205.61, a one-month low. The Dow slid as much as 245.51 points earlier and logged its biggest single-session slide since falling 307 points on March 24, 2003.

Broader stock indicators declined. The Standard & Poor's 500 index lost 21.76, or 1.68 percent, to 1,270.32, its lowest since finishing at 1,262.86 on Feb. 13; the Nasdaq fell 33.33, or 1.5 percent, to 2,195.80, showing a loss for the first time in 2006.

Declining issues led advancers by nearly 5 to 1 on the New York Stock Exchange, where volume of 2.1 billion shares topped the 1.7 billion shares that changed hands yesterday.

The prospect of higher interest rates hurt bonds, with the yield on the 10-year Treasury note surging to 5.16 percent from 5.1 percent late yesterday. Last Friday, bond yields reached a four-year high of 5.19 percent.

While today's retreat reflected Wall Street's ongoing nervousness about interest rates, investors may have gotten ahead of themselves before last week's Fed meeting. Many traders were betting that the central bank would pause its two-year streak of rate hikes, and catapulted the major indexes to fresh multiyear highs.

The Fed boosted rates to 5 percent and left flexibility to pause its rate tightening. However, the Fed cautioned that soaring oil and gold prices pose a threat to inflation and could warrant higher interest rates to stifle demand and keep prices from escalating. The CPI report and yesterday's producer price index reading reinforced that warning.

Gregory Miller, SunTrust Banks' chief economist, said the market was still largely split on whether the Fed will increase the key short-term lending rate by another quarter percentage point when policymakers meet on June 29.

"It won't surprise me if this is when they decide to start the pause and allow data to accumulate," Miller said. "I suspect what they'll find is energy prices will stop trending higher, and the slower growth numbers will accumulate."

The U.S. dollar continued losing ground to the Japanese yen and weighed on the market's mood, CyberTrader's Tower said. The dollar's retreat could propel inflation since more of the U.S. currency will be needed to purchase foreign-made goods.

"The dollar has depreciated quite sharply since the Fed started talking about stopping its rate hikes," Tower said. "It's not so much that the dollar is depreciating — it's the speed of the depreciation that is worrying the currency market. The dollar is down 6 percent in one month, which is a lot."

Crude futures dipped on data showing U.S. gasoline reserves grew for a third week in a row. A barrel of light crude dropped 84 cents to settle at $68.69 on the New York Mercantile Exchange.

HP was the Dow's sole winner after saying improved sales boosted its profit by 51 percent last quarter. The company also announced plans to consolidate its global data centers in an effort to trim $1 billion of expenses. HP climbed $1.05 to $32.16.

Applied Materials Inc. fell 92 cents to $16.93 despite posting a sharp rise in quarterly earnings, handily beating Wall Street expectations. The chipmaker also forecast results ahead of current estimates.

Xstrata PLC offered to pay $14.5 billion for the 80.2 percent of Canadian mining company Falconbridge Ltd. it doesn't already own, topping Inco Ltd.'s $17.7 billion advance. The $47.19-per-share bid sent Falconbridge shares up $1.16 to $49.94.

Honda Motor Co. plans to build a new U.S. plant — its sixth in North America — as part of $1.18 billion expansion to meet surging demand for its cars. Honda slipped 83 cents to $34.25.

The Russell 2000 index of smaller companies tumbled 11.62, or 1.58 percent, to 725.85.

Overseas, Japan's Nikkei stock average added 0.92 percent. Britain's FTSE 100 lost 2.92 percent, Germany's DAX index sank 3.4 percent and France's CAC-40 was lower by 3.18 percent.