updated 2/12/2007 9:50:52 AM ET 2007-02-12T14:50:52

Wall Street retreated sharply Friday as investors glumly absorbed a spike in oil prices and comments from two Federal Reserve officials that unexpected economic growth could prompt an interest rate hike.

Major Market Indices

Stocks had spent most of the session in positive territory after Thursday’s pullback made for fertile ground for bargain hunters. The market also got a lift from analyst upgrades of the automobile sector, which sent Ford Motor Co. and General Motors Corp. higher.

But investors began to sell after St. Louis Fed President William Poole and Dallas Fed President Richard Fisher both warned rates will go higher if inflation doesn’t ebb. Wall Street has been looking for any clues about how central bankers are viewing the economy, and which way it might lead on interest rates this year.

Investors also digested a handful of earnings reports and watched the movements of crude oil, which crossed $60 per barrel for the first time since early January. MasterCard Inc. also weighed on the market after it warned 2007 margins might be weaker than last year’s performance.

“I do think that in order for this market to continue to rally, we’re going to need further confirmation of an economy that’s growing and the risks of inflation have abated,” said Peter Cardillo, chief market economist for Avalon Partners.

According to preliminary calculations, the Dow Jones industrial average fell 56.80, or 0.45 percent, at 12,580.83 after also pulling back on Thursday amid concerns about the housing market.

Bond prices fell sharply following speeches by the two Fed presidents; the yield on the benchmark 10-year Treasury note rose to 4.78 percent from 4.73 percent late Thursday. The dollar was mixed against other major currencies, while gold prices rose.

Also influencing the fixed-income market were comments from Cleveland Fed President Sandy Pianalto that “recent data are encouraging” for the housing sector, according to prepared remarks.

Light, sweet crude was up 18 cents at $59.89 a barrel on the New York Mercantile Exchange. Oil settled at its highs of the year Thursday amid cold weather and a production outage in California.

“The market has been trading without a lot of economic information to this point but generally oil prices are providing somewhat of a headwind,” said Lynn Reaser, chief economist with the investment strategies group at Bank of America.

Reaser said the market is searching for a catalyst to make a definitive move, and has fluctuated as earnings are released and on economic data. However, she believes the market is showing “very small moves” and that the market is “just treading water.”

“It could be back and forth until we see the next potential catalyst that could come from earnings, or oil prices, or economic activity or any developments at the Federal Reserve,” she said.

Earnings reports continued, with reports from Gateway Inc., MasterCard International Inc. and Weyerhaeuser Co. Earnings results have in recent weeks drawn mixed reviews from Wall Street, which is concerned about how well profits will hold up in the first quarter. Strong showings, such as that from Cisco Systems Inc. earlier this week, have temporarily leavened stocks, but failed to add to momentum.

Ford and GM were upgraded on speculation that a restructuring of their health care obligations would be good for investors. GM shares added $2.21, or 6.5 percent, to $36.01; Ford rose 18 cents, or 2.1 percent, to $8.73.

MasterCard, one of the world’s largest credit card brands, fell after hitting a new 52-week high of $118.07 Friday. The company’s fourth-quarter profit topped Wall Street expectations as strong consumer spending boosted transactions, but warned 2007 margins might come in weaker than last year. The stock was down $11.14, or 9.7 percent, at $103.60.

Weyerhaeuser Co., the forest-products company, swung to a profit from a loss in the fourth quarter and continues to feel pressure from the weak homebuilding market and lumber pricing. The stock fell 85 cents to $78.14.

Generic drug makers gained attention after a U.S. court ruled Sanofi-Aventis SA’s blood-thinner Lovenox will lose patent protection in 2012. Teva Pharmaceuticals Inc. and closely held Amphastar Pharmaceuticals Inc. prevailed over the French drug maker, allowing the companies to launch a generic version once the patent expires. Sanofi fell 55 cents to $43.78, while Teva advanced 9 cents to $35.

Hedge fund Fortress Investment Group Inc. surged in its market debut. The stock rose $12.50, or 68 percent, to $31.

Advancing issues outnumbered decliners by about 2 to 1 on the New York Stock Exchange, where volume came to 1.63 billion shares.

The Russell 2000 index of smaller companies was down 9.28, or 1.14 percent, at 807.11.

Overseas, Japan’s Nikkei stock average closed up 1.23 percent. Britain’s FTSE 100 was closed up 0.57 percent, Germany’s DAX index rose 0.50 percent, and France’s CAC-40 finished up 0.48 percent.

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