Inflation Fears Trip Stocks

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U.S. stocks ended lower Tuesday after news of an uptick in inflation strengthened expectations the Federal Reserve will increase interest rates, and several companies posted disappointing quarterly reports.

The Dow Jones industrial average was down 59.95 points, or 0.54 percent, at 11,125.73. The Standard & Poor's 500 Index was down 5.74 points, or 0.45 percent, at 1,270.92. The Nasdaq Composite Index was down 29.48 points, or 1.41 percent, at 2,061.99.

The Nasdaq dropped sharply after Whole Foods Market (WFMI) said late on Monday sales were weaker than forecast. The high-end grocer's news knocked its shares down nearly 12 percent and weighed on shares of coffee chain Starbucks Corp. (SBUX), another Nasdaq-traded stock.

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Shares of companies heavily influenced by economic cycles, including manufacturers Caterpillar Inc. (CAT) and Alcoa Inc. (AA), led declines on the Dow as investors worried that signs of rising prices will make the Fed raise rates on Aug. 8.

"Everything is getting crushed here," said Phil Orlando, chief portfolio manager at Federated Investors in New York.

"The inflation readings here were very disconcerting; at the same time you had a number of companies reporting earnings that the market did not respond to well," he added.

A U.S. government report on spending showed a key inflation measure rose in June, while a separate survey showed prices paid by manufacturers in July at their highest in nine months.

Many investors expect the Fed to pause in raising rates after two years of steady small increases, but analysts said the data may tilt the Fed to raise its benchmark fed funds rate yet again, for an 18th straight time, to head off inflation.

Short-term rate futures showed a 43 percent chance for a fresh rate hike, up from 32 percent on Monday.

Shares of Whole Foods fell 11.8 percent to $50.75 on the Nasdaq and Starbucks lost 3.7 percent to $32.96.

Another drag on Nasdaq was Expeditors International of Washington Inc. (EXPD). The logistics company announced a sharp rise in quarterly profit, but it fell short of market expectations, sending its stock down 10.8 percent to $40.56.

Eastman Kodak Co. (EK) added to the market's negative tone. The photographic film maker posted a wider second-quarter net loss and cut its revenue outlook. Its shares fell 13.7 percent to $19.20, the lowest in more than 15 years.

Caterpillar (CAT) shares fell 1.6 percent to $69.71 on the New York Stock Exchange, while Alcoa shares declined 2.2 percent to $29.29.

Shares of General Motors Corp. (GM), the world's largest automaker, dropped 2.9 percent to $31.30 and was one of the biggest drags on the blue-chip Dow, after it said July sales declined 19.1 percent.

Casual-dining restaurant shares fell after Burger King Holdings Inc. (BKC) reported a quarterly loss in its first report as a stand-alone public company. Burger King shares plunged 13.2 percent to $13.24 on the NYSE.

"Restaurant companies are essentially the canary in the financial coal mine," said Hans Olsen, chief investment officer at Bingham Legg Advisers in Boston. "The first thing consumers do when they start to get pinched is stop going out to eat."

Other restaurant shares slipping were Brinker International Inc., down 2.1 percent at $31.72 and Applebee's International Inc. down 2.3 percent at $17.35.

One bright spot was utilities shares, which as a group , rose 1.1 percent as a heat wave gripped the eastern United States.

Trading was active on the NYSE, with about 1.66 billion shares changing hands, above last year's daily average of 1.61 billion, while on Nasdaq, about 1.67 billion shares traded, below last year's daily average of 1.80 billion.

Declining stocks outnumbered advancing ones by a ratio of 8 to 5 on the NYSE and by 5 to 2 on Nasdaq.

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