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CPI's Bad News Knocks Stocks, Bonds for a Loop

The numbers fail to damp inflation fears.

A bad inflation report has sent bonds spiraling lower, and stocks are set to follow.

The April

consumer price index

gained an unexpected 0.7% -- well above the 0.4% that economists had expected. The core, which excludes the often volatile food and energy sectors, added 0.4%. Here, economists had expected a 0.2% gain.

With the yield on the 30-year looking like it's heading toward 6%, it's going to be an ugly morning on Wall Street.

"This is for real," said Tony Crescenzi, chief bond market strategist at

Miller Tabak Hirsch

. "There's selling all around. It's very hard to defend a bullish view at the moment."

The news increases the chances that the

Federal Open Market Committee

will start getting hawkish at its meeting next Tuesday.

"The Fed could shift to a tightening bias as early as Tuesday," said Crescenzi. "They need to respond to this swiftly. If they don't show themselves to be decisive now, it could hurt their credibility. They need to show vigilance."

For a long time now, people have said the only thing that could derail the bull market in stocks was a

Federal Reserve

that was tightening. Now stocks are set for a big drop at the bell.

"It looks like they're going to rough them up pretty bad on the open," said Jim Benning, a trader at

BT Brokerage

. Benning said he "wouldn't be surprised to see some buyers come in" later in the day as people try to buy on the dip. But if the Fed really is moving toward a rate hike, that could be a bear trap.

At 9 a.m. EDT, the

S&P 500

futures were off 17, putting them more than 14 below fair value and indicating a sharp drop at the open. The 30-year Treasury was down 1 21/32 to 91 9/32, lifting the yield to 5.87%.

With earnings season just getting under way, Tokyo traders struck a cautious stance. The


gave back 40.86 to 16,810.39.

As expected, Hong Kong stocks slumped as shares from


placement Tuesday came to market. The

Hang Seng

fell 198.15, or 1.5%, to 12,855.52.

European markets were all lower in the wake of the CPI. In Frankfurt, the


was off 2.93 to 5245.09. In Paris, the


was down 74.47, or 1.6%, to 4341.41. In London, the


was down 117.6, or 1.8%, to 6339.

Friday's Wake-Up Watchlist

By Elizabeth Roy
Staff Reporter

  • Farm and construction equipment makers Case (CSE) and New Holland (NH) - Get Free Report are in merger talks, The Wall Street Journal and the Financial Times report, citing people familiar with the situation. TSC has been reporting on unusual activity in Case options all week. Case traded up 1 7/16 at 44 1/4 in premarket activity.
  • 3Com (COMS) - Get Free Report could be taken over by year-end, Gene Marcial's oft-mistaken Inside Wall Street column in the new issue of Business Week claims, naming Ericssonundefined and Lucent (LU) - Get Free Report as possible acquirers. 3Com traded up 1 13/16 at 28 1/2 in premarket activity.
  • American Home Products (AHP) is early-stage talks to settle thousands of lawsuits brought by people who took its diet drugs Pondimin and Redux, the Journal reports, citing lawyers involved. The drugs were recalled in September 1997 after being linked to possible heart-valve damage. In other news (earnings estimates from First Call):
  • @Home (ATHM) - Get Free Report traded up 8 11/16 at 158 after last night announcing a strategic pact with Microsoft (MSFT) - Get Free Report.
  • Fred'sundefined reported first-quarter earnings of 24 cents a share vs. 19 cents last year, in line with expectations.
  • Honda (HMC) - Get Free Report reported better-than-expected fourth-quarter results. The company reported a 4.4% rise in pretax profit from operations. According to Bloomberg, analysts expected a 5.5% drop.
  • Key Energy (KEG) - Get Free Report reported a third-quarter loss of $1.03 a share excluding charges, vs. a 35-cent profit last year. The consensus estimate was for a $1.18-a-share loss.
  • TRW (TRW) adjusted first-quarter earnings to reflect its acquisition of LucasVarity. The company revised results to show a loss of 24 cents a share, reversing the original 83-cent profit.
  • Vencor (VC) - Get Free Report reported a first-quarter loss of 18 cents a share, a penny wider than expected, reversing a 39-cent profit last year.