Dow Ends Down 31 on Jump in Inflation

Trader John Yaccarine watches the numbers from the floor of the New York Stock Exchange in the last half hour of trading, Monday Oct. 16, 2006. Wall Street extended its record-setting advance Monday, sending the Dow Jones industrial average within a whisper of 12,000 as investors grew more optimistic that corporate profits will remain robust amid a slowing economy. (AP Photo/Richard Drew) (Richard Drew - AP)

NEW YORK -- Wall Street retreated Tuesday from attempts to push the Dow Jones industrial average to 12,000, rattled by unfavorable economic data and concerns that earnings from technology companies will be disappointing.

Stocks snapped a three-session rally that had propelled the Dow to within three points of reaching the psychologically important milestone for the first time. Investors had built up an uneasy optimism that corporate profits will remain robust as the Federal Reserve navigates a soft landing for the economy.

That confidence was dealt a setback on Tuesday after the Labor Department reported a bigger-than-expected jump in core wholesale inflation, which unearthed the market's fears of higher interest rates. Also exasperating investors was a downgrade of Dow component Intel ahead of its third-quarter earnings report.

"There's that feeling of the Goldilocks scenario, and the market has been at very overbought levels," said Chris Johnson, director of quantitative analysis for Schaeffer's Investment Research. "The gains we've seen over the last three or four weeks have taken the market to an extreme, and it warrants a rest. At some point you just extend yourself too far."

The rest came in a pullback in the Dow of 30.58, or 0.26 percent, to 11,950.02.

Broader stock indicators also declined. The Standard & Poor's 500 index was down 5.00, or 0.37 percent, at 1,364.05, and the Nasdaq composite index fell 18.89, or 0.80 percent, to 2,344.95.

Light, sweet crude was down $1.01 at $58.93 a barrel on the New York Mercantile Exchange.

Concern about inflation helped push bonds higher, with the yield on the benchmark 10-year Treasury note slipping to 4.77 percent from 4.79 percent late Monday. The dollar was mixed against other major currencies, while gold prices fell.

The Labor Department said its producer price index fell 1.3 percent in September, the biggest decline in three years, while its core PPI, which excludes food and energy prices, climbed 0.6 percent, rather than 0.2 percent expected.

The stock rally that began in September had been predicated on hopes for strong corporate profits amid a slowing economy. Wall Street was able to weather a series of mixed economic reports on the belief that central bankers might even have enough evidence to begin cutting rates in early 2007.

Meanwhile, a huge drop in oil prices helped bolster hope consumer spending would be given a shot in the arm. The new round of inflation worries jolted the markets, and gave rise to speculation the Fed might have to rethink its strategy.

"I think the Fed is going to weigh some of the data here," said Andrew Richman, managing director of SunTrust Banks Inc.'s personal asset management division. "They're pretty transparent that inflation is a concern."