Inflation fears end rally, sending stocks down

NEW YORK (Reuters) - U.S. stocks fell on Thursday as a weakened dollar and a surge in oil prices kindled fresh concerns about inflation, snuffing out a two-day rally that followed the Federal Reserve’s deep interest-rate cut.

Initial optimism that the Fed’s aggressive move would keep the economy out of recession gave way to concerns about the inflationary impact of a flagging dollar, which raises the cost of imported goods.

Banks and brokerages slid, meanwhile, as investors locked in gains booked since the rate cut on Tuesday. Shares of Lehman Brothers Holdings IncLEH.N, which rose 10 percent after reporting strong quarterly results on Tuesday, fell 2.8 percent to $62.31.

“The U.S. has cut rates, and so it’s less attractive to hold dollars. I think it causes an adjustment in all asset classes denominated by dollars.” said Milton Ezrati, senior economic strategist at Lord Abbett & Co., in New York.

But he added that “it’s not at all surprising that the market would go down, even without the dollar, after the last couple of days of enthusiasm.”

A rise in oil prices to a record above $84 a barrel exacerbated inflation concerns, while scattered evidence pointing to a prolonged economic slowdown further soured the mood.

FedEx Corp. FDX.N, a package delivery company whose performance serves as a business barometer, lowered its profit outlook for the full year, citing a tepid economic environment. Its shares dropped 2.9 percent to $104.45, while the Dow Jones transport average .DJT fell 1.9 percent.

The National Retail Federation said U.S. holiday sales are expected to rise at their slowest pace in five years, sending the S&P retail index .RLX down 2 percent.

The Dow Jones industrial average .DJI was down 48.86 points, or 0.35 percent, to end at 13,766.70. The Standard & Poor's 500 Index .SPX was down 10.28 points, or 0.67 percent, to finish at 1,518.75. The Nasdaq Composite Index .IXIC was down 12.19 points, or 0.46 percent, to close at 2,654.29.

Traders work on the floor of the New York Stock Exchange, September 19, 2007. REUTERS/Brendan McDermid

The dollar dropped to a record low against the euro, now worth more than $1.40. While a weakening dollar can give a lift to shares of companies that are big exporters, it also threatens to make inflation worse because of the United States’ heavy reliance on imported goods.


After the closing bell, shares of Oracle Corp. ORCL.O and Nike Inc. NKE.N rose after reporting results that beat expectations. Oracle advanced 1.2 percent to $21.30 in electronic trade, while Nike gained 3.6 percent to $60.44.

During the regular session, Bear Stearns Co Inc BSC.N shares slipped 0.2 percent to close at $115.46 on the NYSE, reversing an earlier gain of 3.3 percent to a session high at $119.50. The investment bank posted a sharply lower profit but its chief financial officer Sam Molinaro said the worst of times are behind the company. He said he sees business returning to normal in 2008.

Other investment banks' shares also dropped, including Morgan Stanley MS.N, down 3.6 percent at $64.63. The S&P financial index .GSPF was down 1.7 percent. The Dow Jones U.S. Home Construction Index .DJUSHB, which also rose sharply after the Fed's rate cut, dropped 5.7 percent.

Among retailers, shares of Home Depot Inc. HD.N fell 2.4 percent to $35.32.

Shares of Circuit City Stores Inc CC.N plummeted 18 percent to $8.67 after the home electronics seller reported a larger-than-forecast quarterly loss.


Oil prices rose above $84 in extended trading as production in the Gulf of Mexico had been shut down as a precaution against a tropical disturbance. October crude CLV7, which expired at the close, settled at a record $83.32 a barrel, gaining $1.39. In electronic trading after the NYMEX open-outcry session ended, crude hit a record $84.10 a barrel.

In his first remarks since the Federal Reserve lowered the benchmark lending rate by half a percentage point on Tuesday, Chairman Ben Bernanke warned Congress that raising the ceiling on the size of loans that mortgage finance enterprises Fannie Mae FNM.N and Freddie Mac FRE.N can buy could undermine market discipline.

At midday, stocks briefly pared losses after stronger-than-expected data on factory activity in the U.S. mid-Atlantic region in September, according to a monthly survey from the Federal Reserve Bank of Philadelphia.

In a separate report, the Conference Board said its Index of Leading Economic Indicators fell 0.6 percent in August, triple the drop of 0.2 percent analysts had forecast.

Trading was below average on the New York Stock Exchange, with about 1.27 billion shares changing hands versus last year’s estimated daily average of 1.84 billion. On Nasdaq, about 1.79 billion shares traded, below last year’s daily average of 2.02 billion.

Declining stocks outnumbered advancing ones by a ratio of about 12 to 5 on the NYSE and by 18 to 11 on Nasdaq.