Inflation worries send Dow down

Investors concerned about inflation after a surprise jump in labour costs bid stocks sharply lower on Wall Street today, with unfounded rumours of a terror threat compounding the selling.

The move lower came despite a drop in oil prices and positive employment news.

Wall Street worried that the Labour Department’s productivity data, which showed a 2.4% jump in unit labour costs, was a harbinger of inflation, since that meant companies were paying more for less productive workers.

With the Federal Reserve clearly willing to keep raising interest rates to fight inflation, investors worried about the potential economic damage of such a rate hike.

Stocks took a sharp dive early in the session after a number of floor traders said a rumour circulated that the Homeland Security Department was going to announce a new terror threat.

Although the rumour proved false, the major indexes had already fallen too much to mount a rally, as concerns about Iran’s nuclear programme and instability in the Middle East grew.

“I think the market here is in a very nervous state,” said Peter Cardillo, chief strategist and senior vice president at SW Bach & Co. “You have geopolitical problems surrounding the Iranian situation heating up, and you have concerns about productivity, and that’s keeping investors very cautious.”

The Dow fell 101.97, or 0.93%, to 10,851.98.

Broader stock indicators also lost ground. The Standard & Poor’s 500 index slid 11.62, or 0.91%, to close at 1,270.84, and the Nasdaq composite index dropped 28.99, or 1.25%, to 2,281.57.

Bonds were little changed, with the yield on the 10-year Treasury note steady at 4.56% from late Wednesday. The yield on the two-year note, however, moved up to 4.57%, causing the latest inversion of the Treasury yield curve. When short-term bonds yield more than long-term, investors take that as a sign of a lack of short-term confidence and an omen of future economic disruption.

The US dollar was mixed against other major currencies, while gold prices rose.

Despite the concerns over Iran, oil prices fell as world leaders sought to minimise the chance of substantial conflict there. A barrel of light crude settled at 64.68 dollars, down 1.88 dollars, on the New York Mercantile Exchange.

A drop in initial jobless claims failed to spark much enthusiasm. The number of first-time jobless claims dropped by 11,000 last week to 273,000. The four-week moving average of claims fell to its lowest level in 5 1/2 years, the Labour Department said.

With the Labour Department’s monthly jobs report due tomorrow, however, investors were more inclined to remain cautious than to celebrate the news. Should job creation boom, that would raise concerns about inflation, while if job growth is anaemic, the Fed’s rate hikes could harm an already-slowing economy.

“You can have all the good jobs data, all the good economic data you want, but until the Fed gets out of the way, there just isn’t really a whole lot of hope for the stock market to move higher,” said Joe Keating, chief investment officer at First American Asset Management in Birmingham, Alabama.

Retail stocks were little changed despite strong sales reports for January, as investors had already bid them higher earlier in the week in anticipation of good news. Wal-Mart led the raft of retail sales announcements with a 4.7% increase in same-store sales, or sales in stores open at least a year, for its best performance since May 2004. Analysts had expected 4.4% sales growth. Wal-Mart rose 14 cents to 46.28.

Rival Target added 49 cents to 55.23 after it too beat Wall Street’s sales forecasts. Department store chains Nordstrom, which added 13 cents to 42.13, and JC Penney, which climbed 9 cents to 56.06, also exceeded expectations.

In earnings news, Tyco International fell 1.30 to 24.80 after its quarterly profits fell 22%, due in part to one-time charges related to discontinued operations.

Declining issues outnumbered advancers by nearly 8 to 3 on the New York Stock Exchange, where volume totalled 1.91 billion shares, compared with 1.93 billion traded on Wednesday.

The Russell 2000 index of smaller companies fell 9.23, or 1.26%, to 726.25.

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