Stocks Dive on Rate Hike Concerns; Dow Negative for Year

Wall Street resumed its retreat with a third straight session of losses Tuesday as declines in oil and gold prices did little to calm anxiety over higher interest rates and a slowing economy. The Dow Jones industrial average is now negative year-to-date for the first time in 2006.

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The Dow tumbled 86.44, or 0.8 percent, to 10,706.14, after losing nearly 100 points on Monday. The Dow is now down 0.11 percent for 2006.

Broader stock indicators pulled back and widened their losses for the year. The Standard & Poor's 500 index dropped 12.71, or 1.03 percent, to 1,223.69, and the Nasdaq lost 18.85, or 0.9 percent, to 2,072.47.

Investors struggled to make sense of the Labor Department's May producer price index, which showed a mild uptick in wholesale prices but a stronger-than-forecast rise in inflation without food or energy costs. The data suggested that energy costs did not grow as much as expected, but the higher core prices nonetheless kept the market on edge.

While a downturn in commodities fed some hopes about easing inflation, persistent uncertainty about whether the Federal Reserve will continue boosting interest rates left investors unwilling to buy stocks amid fears of an economic crash.

"(The PPI data) was not conclusive enough to drive the market," said Rick Pendergraft, an equity trader for Schaeffer's Investment Research. If Wednesday's consumer price data comes in below or meets expectations, that might spark a rally following stocks' hefty slide over the past month, he said.

Wall Street's pullback trailed sharp losses on stock markets worldwide, which were driven by worries that a weakening U.S. economy will overturn other economies in its wake. The continued inversion of short- and long-term bond yields was also evidence of the market's expectations of an economic slowdown.

Declining issues topped advancers by about 4 to 1 on the New York Stock Exchange, where volume of 2.31 billion shares led the 1.63 billion shares that changed hands Monday.

Overseas stock markets continued suffering from concerns that rising interest rates will U.S. demand for foreign-made products. Japan's Nikkei stock average plunged 4.14 percent to a two-year low, and stocks in India slid 4.4 percent to a 52-week low.

Elsewhere overseas, Britain's FTSE 100 lost 1.8 percent, Germany's DAX index sank 1.92 percent and France's CAC-40 was lower by 2.24 percent.

The Labor Department's PPI report — seen as a precursor to consumer-level inflation — gave Wall Street a mixed reading on wholesale prices. While overall PPI for May gained just 0.2 percent, core prices rose 0.3 percent to top economists' estimates of 0.2 percent.

But Ken McCarthy, chief economist for vFinance Investments, said the gain in core PPI was not a major concern since annual core inflation still stood at a mild 1.5 percent rate. He added that the PPI was less significant because it included only finished goods, while Wednesday's consumer price index would also account for services.

"It's encouraging that we're not seeing (the impact of energy costs) in core finished goods," McCarthy said. "But this is just the appetizer before tomorrow's main event."

Other data reinforced beliefs that soaring gasoline prices have begun to choke consumer spending, which might cool the economy enough to keep the Fed from hiking short-term lending rates. The Commerce Department said May retail sales grew 0.1 percent after surging 0.8 percent in April; excluding automobiles, retail sales gained 0.5 percent.

Bonds drifted, with the yield on the 10-year Treasury note slipping to 4.96 percent from 4.98 percent late Monday. However, the 2-year yield stood at 5.01 percent; the inversion of yields signaled heightened expectations for slowing economic growth.

The U.S. dollar gained on the Japanese yen and was flat against European currencies; gold prices plunged to about $570 per ounce and carried other metals lower, which bode well for the inflation outlook.

Crude futures plunged as Tropical Storm Alberto posed less of a threat to U.S. refineries in the Gulf of Mexico. A barrel of light crude dropped $1.80 to $68.56 on the New York Mercantile Exchange.

In earnings news, Goldman Sachs Group Inc. (GS) posted sharply better-than-forecast results for the second quarter but warned that continued market weakness could hurt its results. Goldman Sachs skidded $5.75 to $139.25.

Best Buy Co. (BBY) said its profit swelled 38 percent to beat estimates as customers bought more big-ticket items and cost-cutting measures boosted its margins. Best Buy jumped $2.66 to $51.69.

Jabil Circuit Inc. (JBL) cut its third-quarter earnings forecast but kept its revenue target intact. Jabil shares plunged $7.11 to $25.31.

The Russell 2000 index of smaller companies dipped 10.47, or 1.53 percent, to 672.72.

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