Stocks fall on rising labor costs

Stocks slid for a second straight session Wednesday after an increase in labor costs stirred concerns about inflation and interest rates and as the yield on the benchmark 10-year Treasury flirted with 5 percent. The Dow Jones industrials fell nearly 130 points.

Economic data showing unit labor costs rose a higher-than-expected 1.8 percent raised concerns of inflationary pressures. The Labor Department also reported that productivity waned in the first quarter as expected. The readings did little to alleviate investor concerns that the inflation-wary Federal Reserve might lean toward raising rates rather than lowering them later this year.

The inflation jitters came alongside the European Central Bank’s widely expected decision to raise its key interest rate by a quarter of a percentage point to 4 percent. Stocks in Europe fell sharply.

“In the last week or two, the expectation that the Fed was going to lower interest rates in the next six months has been put to the side so the bond market has reacted,” said George Shipp, chief investment officer at investment adviser Scott & Stringfellow, referring to a recent rise in bond yields. Yields, which move higher as bond prices fall, have increased as investors have regarded a reduction in interest rates as less likely.

Shipp contends investors shouldn’t read too much into the pullback in stocks.

“The market has come a long way. We’re down for a couple days but we’ve been up for 11 out of the last 12 months. Right now you’d have to call it normal profit taking.”

The Dow fell 129.79, or 0.95 percent, to 13,465.67.

Broader stock indicators also fell. The Standard & Poor’s 500 index fell 13.57, or 0.89 percent, to 1,517.38, and the Nasdaq composite index fell 24.05, or 0.92 percent, to 2,587.18.

The decline Wednesday came a day after the three major indexes slumped following remarks from Fed Chairman Ben Bernanke and service sector data that hinted the economy is on the rebound, lowering the chance of an interest rate cut. But despite the fresh concerns about inflation, the economic picture doesn’t appear to have changed substantively from last week when the S&P 500 broke a seven-year-old closing record and the Dow continued to hit fresh highs.

“I think the underlying fundamentals that have gotten us to this point — global growth, excellent corporate profitability, obviously a lot of merger activity — haven’t changed,” Shipp said.

Wall Street kept a close eye on the Treasury market as the 10-year note’s yield approaches 5 percent, a level not seen since August 2006. Bonds rose as stocks fell; the yield on the benchmark 10-year Treasury note fell to 4.97 percent from 4.98 percent late Tuesday.

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

Light, sweet crude rose 35 cents to $65.96 per barrel on the New York Mercantile Exchange.

Along with the Labor Department data, the stock and bond markets received comments from Fed officials. Richmond Fed President Jeffrey Lacker, speaking in Frederick, Md., reiterated long-standing concerns about inflation but said the economy appeared poised for increased growth. Kansas City Fed President Thomas Hoenig said the economy is likely pick up steam as the year continues.

Declining issues outnumbered advancers by about 4 to 1 on the New York Stock Exchange, where volume came to 1.55 billion shares compared with 1.51 billion traded Tuesday.

The Russell 2000 index of smaller companies fell 7.04, or 0.83 percent, to 841.21.

In other overseas trading, China’s benchmark Shanghai Composite Index rose 0.2 percent, while Japan’s Nikkei 225 index fell 0.07 percent. Britain’s FTSE 100 fell 1.66 percent, Germany’s DAX index fell 2.40 percent, and France’s CAC-40 fell 1.66 percent.