Inflation Data Damps Stocks

A surprisingly strong inflation report left stocks broadly but modestly lower Wednesday, though they recovered from their worst levels of the day after bond yields pulled back from five-month highs reached early in the session.

The dollar rallied, and its new popularity came partly at the expense of gold, which fell for a second straight day.

The 0.5% jump in the consumer price index in March was well above expectations, and initially drove Treasury bond yields up sharply -- continuing the trend of recent sessions, as investors have begun to worry that the Federal Reserve would soon begin to tighten credit.

The 10-year Treasury note jumped as high as 4.45% early in the day from 4.35% on Tuesday. But buyers emerged later, and the T-note ended at 4.36%.

Shorter-term yields, however, held on to most of their gains. The two-year Treasury note yield closed at 2.07%, up from 1.99% on Tuesday.

On Wall Street, the Dow Jones industrial average slipped 3.33 points, or less than 0.1%, to 10,377.95, after falling as much as 59 points early on.

The Nasdaq composite index eased 5.23 points, or 0.3%, to 2,024.85. The Standard & Poor’s 500 index was down 1.27 points, or 0.1%, to 1,128.17.

Despite the modest declines in the indexes, falling stocks outnumbered winners by more than 3 to 1 on the New York Stock Exchange and by 3 to 2 on Nasdaq.

Still, the stock market’s performance was far better than on Tuesday, when the Dow sank 1.3% as bond yields jumped after a stronger-than-expected March retail sales report.

Analysts say investors are trying to sort out the net effect on the market as the robust economy drives interest rates up, while also boosting corporate earnings.

“The good news is that the recovery appears firmly in place, with stronger employment, strong retail sales and good corporate profit reports,” said Rick Giesen, director of value equity for National City Investment Management in Cleveland. “The bad news is on the inflationary front, and that some of the fears about a rate tightening are negatively impacting stocks and bonds.”

Rates would have to rise dramatically before they would dent many companies’ bottom lines, said Brian Bush, research chief at brokerage firm Stephens Inc. in Little Rock, Ark.

Even so, investors’ concern about how soon the Fed might tighten credit, combined with tension over the U.S.-led campaign in Iraq, may lead to higher market volatility in the coming months, he said.

“The prospect for higher rates along with the geopolitical environment are capping stocks in somewhat of a tight trading range right now, when otherwise, if we were getting these good earnings report, stocks would be moving higher,” Bush said.

In the bond market, some analysts said the pullback in yields late Wednesday was more technical than fundamental, and probably would be temporary.

Among Wednesday’s market highlights:

* Interest-rate sensitive financial stocks were mostly lower. American Express lost $1.60 to $49.80, and Northern Trust fell $2.16 to $44.01.

* Intel fell 30 cents at $27.37 after its earnings report issued late Tuesday missing some analysts’ expectations.

* McDonald’s sank $1.27 to $27. It reported strong March sales and said earnings probably would beat Wall Street estimates, but warned of lighter growth in the European market.

* On the plus side, Dupont jumped $1.31 to $45 after the chemical company said first-quarter earnings would be significantly higher than previously forecast, partly because of improvements in its agriculture and nutrition businesses.

* Walt Disney was unchanged at $25 while unwanted suitor Comcast rose 66 cents to $30.65. That put the value of Comcast’s stock-swap offer at $23.91 per Disney share, or 4.4% below Disney’s market price. That is the narrowest that gap has been since Comcast made its offer in February.

* The dollar jumped to 108.88 yen from 106.67 on Tuesday. Higher U.S. interest rates could make dollar-denominated bonds more appealing to foreign investors, helping to bolster the dollar, traders said.

* Gold fell $7.20 to $399.80 an ounce in New York futures trading. Gold benefited as the dollar was falling last year, but now is losing out as the buck rebounds.