U.S. stocks tumbled the most since January after the latest government report on inflation shocked investors and increased speculation that the Federal Reserve may have to keep raising interest rates and restrain the economy.
U.S. Treasuries fell, and the dollar rose versus the euro and the yen. The following is a summary of today’s markets: Goldman Sachs Group Inc., Merrill Lynch & Co. and Morgan Stanley helped lead declines among financial companies, whose earnings are sensitive to rate changes. General Motors Corp. tumbled after saying its chief accounting officer resigned.
Exxon Mobil Corp. and Alcoa Inc. paced a selloff in commodity producers, the market’s top performers this year, after government figures showed consumer prices rose more in April than economists forecast. Losses among technology stocks sent the Nasdaq Composite Index lower for the year.
“It’s finally dawning on people that the Fed is going to have to keep raising rates until the economy slows,” said Edgar Peters, who helps manage $18 billion as chief investment officer at PanAgora Asset Management in Boston. “It’ll be a more difficult year than they’d hoped.”
The Dow Jones Industrial Average dropped 214.28, or 1.9 percent, to 11,205.61, its biggest drop since Jan. 20. The Standard & Poor’s 500 Index lost 21.76, or 1.7 percent, to 1270.32 with all 10 of industry groups losing more than 1 percent. The Nasdaq decreased 33.33, or 1.5 percent, to 2195.80 and is now down 0.4 percent for 2006.
U.S. Treasuries fell after a government report showed consumer prices in April climbed more than economists forecast, bolstering concern that inflation is accelerating.
The Labor Department report adds to speculation that the Federal Reserve may be falling behind in its effort to keep inflation in check even as the economy shows signs of slowing. Inflation erodes the purchasing power of a bond’s fixed payments.
Investors “want the Fed to be vigilant on inflation,” said Peter Cordrey, head of liquid products, which include Treasuries, at Prudential Investment Management in Newark, New Jersey. The firm oversees about $170 billion in fixed-income assets.
“But the Fed is in a tough spot. The economy can slow down and still have inflation.” The yield on the benchmark 10-year note rose more than 5 basis points, or 0.05 percentage point, to 5.15 percent at 4:02 p.m. in New York, according to bond broker Cantor Fitzgerald LP. The yield increase is the most since it climbed 9 basis points on May 1. The price of the 5 1/8 percent note maturing in May 2016 fell about 3/8, or $3.75 per $1,000 face amount, to 99 25/32.
Today’s report comes a week after Fed policy makers said in a statement that inflation expectations are contained.
The dollar rallied, posting its biggest gain against the yen in 11 months, after a report showed U.S. inflation is accelerating and France’s finance minister said he would attempt to keep the euro from strengthening.
“The market had gotten too complacent on the idea that inflation was subdued and the Fed would be pausing,” said Samarjit Shankar, director of global strategy for the foreign exchange group in Boston at Mellon Financial Corp. “The numbers today have put dollar bears on their back foot.” The U.S. currency had slumped 8.8 percent versus the euro and 7.3 percent against the yen this year on anticipation the Federal Reserve was close to ending its more than two-year cycle of interest rate increases to subdue inflation.
The dollar strengthened 1.1 percent to 110.93 yen at 4:10 p.m. in New York, the biggest gain since June 1O, 2005. It reached an eight-month low of 109 earlier. Against the euro, the dollar rose 0.8 percent to $1.2755 from $1.2859. It had been trading near its strongest versus the dollar in a year.
The U.S currency advanced against 14 of the 16 most-actively traded currencies tracked by Bloomberg.
