Stocks slide as inflation threat rises

SATURDAY, SEPT. 30, 2006

Wall Street ended a stellar third quarter with a moderate decline Friday, as the Dow Jones industrial average pulled back further from record-high levels. The major indexes closed out the week, month and quarter with gains.

The day’s economic news was gloomy and money managers made few bold moves as the quarter ended.

“This is possibly a short-term top,” said Ken Tower, chief market strategist for Schwab’s CyberTrader, said of the Dow’s briefly surpassing its closing record of 11,722.98 on Thursday.

“The Dow has been flirting with an all-time high; the market may be due for a little rest as we enter October.”

Stocks dipped after St. Louis Federal Reserve President William Poole said the Fed would continue to watch economic data as it sets interest rate policy. His comments were seen as leaving the door open to additional interest rate hikes if inflation necessitates them; traders had been hoping the hikes were over.

The Dow fell 39.38, or 0.34 percent, to 11,679.07. The blue chip index briefly crossed its closing high on Thursday, then fell back. It has yet to surpass its all-time trading high of 11,750.28; both highs were set Jan 14, 2000.

Broader stock indicators also fell. The Standard & Poor’s 500 index fell 3.30, or 0.25 to 1,335.85, and the Nasdaq composite index fell 11.59, or 0.51 percent, to 2,258.43. The S&P 500 remains near a 5 1/2-year high.

Bonds, meanwhile, fell, with the yield on the 10-year Treasury note at 4.63 percent, up from 4.61 percent Thursday. The dollar was higher against other major currencies. Gold prices fell.

Crude oil futures rose. A barrel of light crude settled at $62.91, up 15 cents, on the New York Mercantile Exchange.

In economic news, the Commerce Department said consumer spending dropped in August by the largest amount in nearly a year and core inflation for August, which excludes volatile food and energy prices, was up a worrisome 2.5 percent compared to a year ago, the biggest yearly increase in more than a decade.

Inflation’s increase was far above what the Federal Reserve has set as its “comfort zone” and the concern on Wall Street is that it could portend additional Fed hikes in its benchmark short-term interest rate.

The department said consumer spending, after adjusting for inflation, dropped by 0.1 percent last month, the first decline since a 0.3 percent fall in September 2005, a month when business activity was disrupted by Hurricane Katrina. Income gains were anemic, rising by just 0.3 percent in August, the weakest performance in nine months.

For the week, the Dow rose 1.49 percent, the S&P gained 1.60 percent and the Nasdaq rose 1.78 percent.

Friday also marked the end of an unusually strong third quarter as stocks rebounded from their May and June tumble. The Dow gained 4.74 percent for the quarter, the S&P 500 rose 5.17 percent and the Nasdaq gained 3.97 percent. Declining prices for oil, commodities and real estate have once again made equities an attractive investment.

Advancing issues led decliners by 3 to 2 on the New York Stock Exchange, where volume was 1.47 billion shares, down from 1.49 billion at the same time Thursday.

The Russell 2000 index of smaller companies fell 6.97, or 0.95 percent, to 725.59.

Overseas, Japan’s Nikkei stock average rose 0.64 percent. Britain’s FTSE 100 fell 0.18 percent, Germany’s DAX index rose 0.25 percent, and France’s CAC-40 was unchanged, but is up 11.34 percent for the year.


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