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Inflation Data Sink Stocks

Robert Holmes

Stocks in the U.S. fell Friday as the latest round of inflationary data led investors to fear that the Federal Reserve might be reluctant to lower rates again.

The Dow Jones Industrial Average dropped 178.11 points, or 1.32%, to 13,339.85, and the S&P 500 was down 20.46 points, or 1.37%, at 1467.95. The Nasdaq Composite was off 32.75 points, or 1.23%, at 2635.74.

The major averages finished with losses of more than 2% over the five sessions, ending a two-week winning streak.

Breadth was negative. On the New York Stock Exchange 3.36 billion shares changed hands, and volume on the Nasdaq reached 1.94 billion shares. Losers beat winners roughly 3 to 1.

"Technically, this is a bad place for the market to close, especially on a Friday," said Paul Mendelsohn, chief investment strategist with Windham Financial. "There was nothing today that was really positive. There was a lack of buying, and we may see that problem as people window-dress from here until the end of the year."

The decline followed a hotter-than-expected read on inflation at the retail level. The Labor Department's consumer price index rose 0.8%, compared with expectations of a 0.6% increase. The core number -- which excludes food and energy -- climbed 0.3%, slightly above estimates.

Investors fear that the unexpected jump in the CPI affirms the Fed's concerns of rising inflation and dampens the hopes for any further rate cuts. The central bank reduced the fed funds rate by 25 basis points on Tuesday but noted higher energy prices as a potential concern for inflation.

The Federal Open Market Committee, the policymaking arm of the Fed, next meets for a two-day meeting on Jan. 29.

"The headline was boosted by energy prices, with gasoline up 9.3%," said Ian Shepherdson, chief economist with High Frequency Economics. "The year-over-year trend remains downwards and the month-over-month data are erratic, but this might be the start of a firming induced by the falling dollar."

U.S. Treasury securities were lower following the CPI report. The 10-year note lost 8/32 in price to yield 4.23%. The 30-year bond was off 7/32 in price, yielding 4.65%. The dollar rallied.

Just one day ago, the Labor Department said its producer price index jumped 3.2% last month, doubling expectations to become the largest increase in more than 34 years. The core PPI rose 0.4% and also was twice what was anticipated.

Also on the economic docket, the Fed said that industrial production rose 0.3% in November, above economists' projections. Capacity utilization rose to 81.5% from 81.4% but was below the consensus.

Following the prior close, Citigroup (C) said it would assume control of seven structured investment vehicles, or SIVs, totaling $49 billion it will add to its books. The rescue puts a strain on Citi's already stressed balanced sheet.

The move also hints at the death of the $100 billion superfund that Citigroup, Bank of America (BAC), and JPMorgan Chase (JPM) hoped to create. After Citi's announcement, Moody's downgraded the firm's long-term debt rating. Shares of Citi were down 31 cents, or 1%, to $30.70.

Despite Citi's advance, several financial subsector indices traded lower. The NYSE Financial Sector Index fell 2%, and the Amex Financial Sub Index eased 0.9%.

Among other losing sectors, the S&P Retail Index slumped 2.4%, the Dow Jones Transportation Average was off 1.7%, and the Philadelphia Semiconductor Sector Index was down 1.6%.

Elsewhere, toolmaker Black & Decker (BDK) slid 6% after lowering its forecast for the fourth quarter and full year. Black & Decker shed $6.82 to $73.31, having touched a 52-week low of $71.95.

As for ratings changes, UBS upgraded Dow component Disney (DIS) to buy from neutral. Shares closed up 25 cents, or 0.8%, to $33.01.

Bear Stearns raised its rating for JetBlue (JBLU) to peer perform from underperform a day after German airline Lufthansa bought a 19% stake in the discount carrier. After jumping 14% Thursday, shares of JetBlue gave back 0.8% to end at $7.09.

Commodity prices lost ground for the session. Crude prices were down 98 cents to $91.27 a barrel. Gold and silver futures were also finished lower.

In Asia's markets, the Hong Kong's Hang Seng fell 1% overnight, and Japan's Nikkei 225 eased 0.1%. European bourses were slightly higher, as London's FTSE 100 added 0.5%, and Germany's Xetra Dax tacked on 0.3%.