Consumer price data slam stocks
Spencer Platt  /  Getty Images
Traders work on the floor of the New York Stock Exchange Wednesday. Nervousness about a stronger-than-expected rise in consumer inflation spooked investors and pulled the Dow down 214 points — its worst one-day point decline since March 2003.
msnbc.com news services
updated 5/18/2006 9:10:47 AM ET 2006-05-18T13:10:47

Stocks plunged Wednesday, with the Dow Jones industrial average sliding 214 points and logging its biggest one-day point drop in over three years, after report showing a stronger-than-expected rise in consumer prices intensified Wall Street’s fear that interest rates will keep climbing.

Investors were disappointed by a Labor Department report that showed its consumer price index swelled 0.6 percent in April , topping forecasts of 0.5 percent. But “core” CPI — which excludes food and energy — also gained 0.3 percent, surpassing economists’ expectations and adding to worries that soaring oil prices have begun to lift prices elsewhere, potentially leading to widespread inflation.

“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?”

The Dow Jones industrial average finished Wednesday down 214.28 points, or 1.88 percent. The Dow slid as much as 245.51 points earlier in the session and logged its biggest single-session slide since falling 307 points on March 24, 2003.

The broader Standard & Poor’s 500-stock index finished Wednesday down 21.77 points, or 1.68 percent, while the Nasdaq Composite index fell 33.33 points, or 1.50 percent, sinking into negative ground for the year.

Last week, the Dow index came within 80 points of its all-time high of 11,722.98, which led many market analysts to conclude that the stock 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.

Investors sold shares in banks, industrial conglomerates and other rate-sensitive companies Wednesday. Wall Street has been anxious about economic news after the Federal Reserve last week said more rate hikes could be needed to battle inflationary pressures from record-high commodities prices. The inflation data also dragged bonds lower and overshadowed solid earnings from Hewlett-Packard Co.

While Wednesday’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 threaten to drive inflation and could warrant higher interest rates to stifle demand and keep prices from escalating. The CPI report and Tuesday’s PPI reading reinforced the Fed’s 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.

“But it won’t surprise me if this is when they decide to start the pause and allow data to accumulate,” Miller said. Looking at data from the first half of the year, “I suspect what they’ll find is energy prices will stop trending higher, and the slower growth numbers will accumulate.”

Major Market Indices

The U.S. dollar continued losing ground to the Japanese yen and also 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 oil futures dipped Wednesday on data showing U.S. gasoline reserves grew for a third week in a row. And 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 Tuesday. Last Friday, bond yields reached a four-year high of 5.19 percent.

Hewlett-Packard was the Dow’s sole winner after saying its profit swelled 51 percent last quarter on improved sales . 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 remaining 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.

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.

The Associated Press and Reuters contributed to this report.

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