New York – Stocks slid for a second straight session Wednesday after an increase in labor costs stirred concerns about inflation and interest rates and as the yield on the benchmark 10-year Treasury flirted with 5 percent. The Dow Jones industrials fell nearly 130 points.
Economic data showing that unit labor costs rose a higher- than-expected 1.8 percent raised concerns of inflationary pressures. The Labor Department also reported that productivity in the first quarter rose by 1.0 percent, compared with the previous quarter. The readings did little to alleviate investor concerns that the inflation- wary Federal Reserve might raise rates rather than lower them later this year.
The inflation jitters came alongside the European Central Bank’s widely expected decision to raise its key interest rate by a quarter of a percentage point to 4 percent. Stocks in Europe fell sharply.
“In the last week or two, the expectation that the Fed was going to lower interest rates in the next six months has been put to the side, so the bond market has reacted,” said George Shipp, chief investment officer at investment adviser Scott & Stringfellow, referring to a recent rise in bond yields. Yields have increased as investors have regarded a reduction in interest rates as less likely.
Shipp contends investors shouldn’t read too much into the pullback in stocks.
“The market has come a long way. We’re down for a couple days, but we’ve been up for 11 out of the last 12 months,” Shipp said. “Right now, you’d have to call it normal profit-taking.”
The Dow fell 129.79, or 0.95 percent, to 13,465.67.
Broader stock indicators also fell. The Standard & Poor’s 500 index fell 13.57, or 0.89 percent, to 1,517.38, and the Nasdaq composite index fell 24.05, or 0.92 percent, to 2,587.18.
Wednesday’s decline came a day after the three major indexes slumped following remarks from Fed Chairman Ben Bernanke and service-sector data that hinted the economy is on the rebound, lowering the chance of an interest-rate cut.
But despite the fresh concerns about inflation, the economic picture doesn’t appear to have changed substantively from last week, when the S&P 500 broke a 7-year-old closing record and the Dow continued to hit fresh highs.
“I think the underlying fundamentals that have gotten us to this point – global growth, excellent corporate profitability, obviously a lot of merger activity – haven’t changed,” Shipp said.
Wall Street kept a close eye on the Treasury market as the 10-year note’s yield approaches 5 percent, a level not seen since August 2006. Bonds rose as stocks fell; the yield on the benchmark 10-year Treasury note fell to 4.97 percent from 4.98 percent late Tuesday.
The dollar was mixed against other major currencies, while gold prices rose.
