Stocks Slide on Inflation Fears

Stocks closed modestly lower Wednesday as the latest batch of upbeat economic data made investors uneasy about more interest rate hikes by the Federal Reserve.

Disappointment over blue chip Procter & Gamble’s lower-than-forecast revenue thumped the Dow Jones industrial average and countered solid earnings from Qwest Communications International and an improved outlook at Qualcomm, as well as a retreat in oil prices.

An unexpected jump in service sector growth extended the recent string of data showing the economy expanding at a brisk pace, with a sharp upswing in factory orders also brightening that picture. However, the gains again had the market concerned about rising interest rates as the Fed continues its fight against inflation.

Russ Koesterich, senior portfolio manager at Barclays Global Investments, said the persistently high level of oil prices was putting pressure on consumer spending, and he added that rising Treasury yields also created some headwind for stocks.

“The inflationary pressures are building, albeit slowly,” Koesterich said. “What we haven’t seen so far is commodities strength, particularly in energy, filter into core inflation. But the fear is that it’s going to happen soon.”

At the close, the Dow was off 16.17 points, or 0.1%, at 11,400.28, after losing as many as 54 points intraday. On Tuesday, the Dow finished at 11,416.45, its best close since Jan. 19, 2000.

Broader stock indicators also drooped. The Standard & Poor’s 500 index slid 5.36 points, or 0.4%, to 1,307.85, and the Nasdaq composite index dropped 5.87 points, or 0.3%, to 2,303.97.

Oil and gasoline futures tumbled after the government reported that gasoline demand had been flat over the last month and that fuel supplies were growing as refineries stepped up output. But crude oil still lingered near record highs as the market fretted about political tension in Nigeria and Iran leading to potential supply cutoffs.

A barrel of light crude slumped $2.33 to settle at $72.28 on the New York Mercantile Exchange.

The threat of rising interest rates dragged on bonds, with the yield on the 10-year Treasury note climbing to 5.14% from 5.11% on Tuesday.

Ken McCarthy, chief economist for VFinance Investments, said bond weakness could persist as traders remain unsettled about Fed Chairman Ben S. Bernanke’s stance on inflation. But despite Wednesday’s decline, McCarthy said he was positive about the market’s underlying strength.

“The market’s fundamentals today are very supportive,” he said. “I think all it’s going to take is some positive news on inflation,” which could come in today’s report on first-quarter worker productivity.

In economic news, the Institute for Supply Management’s April service index gained 2.5 points to 63; economists had forecast a 0.9 slide. The Commerce Department said factory orders bounced back to grow 4.2% in March, up from a 0.4% increase the month before.

In other market highlights:

* Consumer products maker P&G; said strong sales and the acquisition of its Gillette razor business helped its profit swell 37% last quarter, but its revenue missed Wall Street targets. P&G; fell $1.89 to $56.22.

* Qwest posted a 54% jump in quarterly profit amid higher sales and better cost control. Qwest nonetheless fell 11 cents to $6.88.

* Qualcomm raised its third-quarter outlook, citing stronger-than-expected orders for its communications chips. Qualcomm added 69 cents to $51.75.

* Clorox lost $2.92 to $61.50 after lowering its forecast for earnings in its fiscal fourth quarter ending in June, citing colder weather, higher commodity prices and stock-option expenses. Chief Executive Gerald Johnston will retire after having a heart attack March 1.

* Cigna slumped $15.50, or 15%, to $90 for the biggest decline in the S&P; 500. Earnings at its U.S. health insurance division dropped 24% as premium income fell.

WellPoint, the largest U.S. health insurance provider, fell $4.50 to $67.55.

* Bausch & Lomb fell $4.78, or 9.8%, to $43.97 for the S&P; 500’s second-biggest decline. The company said more versions of its ReNu line of contact-lens cleaners were tied to a potentially blinding eye infection. Of the 58 people with fungal infections, 32 used MoistureLoc, the version withdrawn last month, 15 used ReNu MultiPlus and seven used other ReNu brands, U.S. health officials said.

* Adobe Systems slid $3.29, or 8.6%, to $35.06. The maker of graphic-design software expects fiscal second-quarter sales closer to $640 million, from a forecast of $640 million to $670 million, as demand falls in Europe and North America. Profit for the three months ending June 2 will be at the low end of its estimate, Adobe said.

* Microsoft slid 84 cents to a multiyear low of $23.17 after a Wall Street Journal report said the software giant might buy a stake in Internet company Yahoo, which gained 32 cents to $32.17.