Loan rate fears send Dow sharply lower

Investors’ growing dread of higher interest rates sent stocks sliding sharply in the United States today, with a solid retail sales report and expectations of higher inflation providing the latest catalyst for a sell-off.

The Commerce Department’s latest retail sales figures showed a larger-than-expected increase in sales, indicating consumers’ hunger for a wide variety of goods. While the data was evidence of an economy on sound footing, it also fed concerns that pent-up demand could drive prices higher.

Should economic reports over the next couple of weeks continue on this track - particularly a key gauge of inflation due out Tuesday – the Federal Reserve may feel the need to raise interest rates by a half percentage point at the end of the month, instead of the quarter point Wall Street has been expecting.

“The benign pace of rates the market has discounted may not be the case now,” said Russ Koesterich, US equity strategist at State Street Corp. “That doesn’t really make stocks look attractive. There’s no real reason to go out and sell everything you own, but no real catalyst to buy, either.”

The Dow Jones industrial average sagged 75.37, or 0.7%, to 10,334.73.

Broader stock indicators were also lower. The Standard & Poor’s 500 index was down 11.21, or 1%, at 1,125.26. The Nasdaq composite index dropped 29.88, or 1.5%, to 1,969.99.

Financial stocks were hit the hardest, along with technology shares and other companies dependent on ready capital, which would become more expensive as rates go higher.

Retail sales were up 1.2% in May, 0.2% higher than expected, the Commerce Department said.

Automotive sales rose a strong 2.7%, the biggest gain since November, while all other goods were up 0.7% for the month. In contrast, April’s retail sales fell 0.6%.

Consumers also want foreign-made goods. The U.S. trade deficit rose to a record 48.3 billion dollars in April, up 3.8% from March’s previous all-time high, the Commerce Department said in a separate report. Higher oil prices contributed to the new record, as well as a drop in US exports.

Investors worried that these figures might be a precursor to a jump Tuesday’s Consumer Price Index report, a key measure of inflation closely watched by investors.

“My suspicion is that the market is nervous ahead of that CPI report, since it could give the Fed increased opportunity to raise interest rates,” said Brian Bush, director of equity research at Stephens Inc. “With the Fed promising to be more aggressive on inflation, it suggests that the Fed is now looking for a reason, almost.”

In corporate news, MGM Mirage Inc. raised its bid for Mandalay Resort Group, now offering 71dollars a share for the rival casino operator, up from the previously rejected offer of 68dollars per share. The deal was negotiated with Mandalay, and is likely to be approved. Mandalay dropped 82 cents to 67.60dollars, while MGM Mirage gained 60 cents to 48.20dollars.

Nokia Corp. fell 16 cents to 14.08dollars after announcing production of five new cell phones and promising to regain lost market share. The company declined to give details on its 2004 forecast.

RealNetworks Inc. and Starz Encore Group LLC, a Liberty Media Corp. subsidiary, launched a joint Internet subscription movie service, offering 100 movies per month for 12.95dollars. RealNetworks was up a penny at 6.01dollars, while Liberty Media fell 20 cents to 9.19dollars.

Declining issues outnumbered advancers by more than 4 to 1 on the New York Stock Exchange.

Volume came to 1.25 billion shares, compared to 1.23 billion on Thursday.

The Russell 2000 index of smaller companies was down 11.45, or 2%, at 557.67.