Dow Falls Amid Inflation Worries

Stocks pulled back Friday after a surprisingly strong economic reading cast doubts about a tame inflation outlook and sent interest rates higher in the bond market.

The Dow Jones industrial average fell 10.73 to 5,722.74, recovering from an afternoon loss of more than 33 points. The blue-chip average had shrugged off some early weakness to post a 5-point gain in the morning, but the tug of a worsening bond market proved too strong. For the week, however, the Dow was up 33.29 points.

Broader measures also trimmed their losses into the close, with smaller and speculative shares outperforming blue-chip and larger-company issues.

Stocks followed bonds lower after the Commerce Department reported that orders to U.S. factories for durable goods rose 1.6 percent to $172.7 billion in July, the second advance in three months. Many analysts had expected a tamer 0.5 percent gain.

As bond prices fell, the yield on the 30-year Treasury bond - a key determinant of borrowing costs that can impact consumer spending and corporate operating costs - jumped from late Thursday’s 6.84 percent to 6.92 percent, its highest level since late July.

The durable goods data wasn’t overly alarming on the inflation front. But it caught a quiet summer market by surprise, countering a stream of tame economic readings that had helped calm the inflation fears that contributed to July’s selloff. Until recently, analysts had been expecting the Federal Reserve to try to avert higher inflation by raising its key lending rates to slow the economy.

“The market was growing overly complacent,” said Sung Won Sohn, chief economist at Norwest Corp. in Minneapolis. “Investors had decided that the economic slowdown is here and that the Federal Reserve won’t be raising interest rates for quite some time. Those expectations have been shaken.”

Although they did not act earlier this week, the central bank’s policy-makers could push rates higher at their next meeting on Sept. 24, if Friday’s report is followed by a series of similarly strong economic readings.

Continued gains in durable-good orders could mean increased production and more jobs. But with unemployment fairly low, the labor market has been very competitive, forcing up wages and other payroll costs, which constitute two-thirds of a product’s price. Higher inflation makes fixed-income securities less valuable, forcing down bond prices to raise their yields.

Declining issues outnumbered advancers by a 5-to-4 margin on the New York Stock Exchange, where volume totaled just 308.02 million shares as of 4 p.m., vs. 354.49 million in the previous session.

The NYSE’s composite index fell 1.49 to 357.23; and the Standard & Poor’s 500-stock index fell 3.65 at 667.03.

The Nasdaq composite index fell 0.91 to 1,143.05, and the American Stock Exchange’s market value index rose 0.62 to 560.94.