Stocks slumped and bond yields reached the highest levels in more than year yesterday as two economic reports gave little comfort to those hoping for a slowdown that would prevent the Federal Reserve from raising interest rates later this month.
The Dow Jones industrial average initially rallied on news from the Labor Department that producer prices, such as those paid to the nation's factories, farms and mines, rose a modest 0.2 percent in May after spiking 0.5 percent in April because of energy prices.
But the broad market index reversed course after a closer look at some underlying prices, especially for commodities and oil-related products, which suggested the long slide in industrial goods prices may be ebbing.
The Dow finished the day down 130.76 points at 10,490.51. After a gain on Monday, the Dow suffered four straight days of losses that trimmed 419 points off the average for the week.
The yield on the benchmark 30-year Treasury bill climbed to 6.16 percent, the highest level in more than a year. Yields on the two-year Treasury, considered the most sensitive to moves by the Fed, have risen by more than a percentage point in the past three months.
Adding to the picture of an economy that just won't quit was a Commerce Department report that retail sales rose 1 percent in May, which was higher than expected, as consumers snapped up automobiles, furniture and appliances, including home electronics.
"The economy still has significant steam," said Lynn Reaser, economist at the Bank of America Private Bank in Jacksonville, Fla. "It will not slow on its own."
Reaser and other economists noted that retail sales are now running about 8 percent ahead of where they were a year ago, off the pace of the first quarter but still growing at a very fast clip.
"Consumers are still confident," said Bruce Van Kleeck, vice president for member services at the National Retail Federation. He said retailers that cater to the teenage and young adult market, such as Old Navy, are doing well, as are even traditional department stores that have lost market share in recent years to discounters and specialty stores.
The producer prices report, meanwhile, showed inflation remains muted and that April's increase was distorted by a sharp rise in energy prices. Year to date, prices for finished goods, excluding the volatile foods and energy components, are virtually unchanged.
"There is no evidence in this report of an adverse shift in inflation trends at the finished goods level," said Bear Stearns economist Melanie Hardy. However, she said the data do not mean the Fed will shy from raising its overnight lending rate by a quarter percentage point when policymakers meet June 29 and 30.
In the financial markets, it was less the good news on inflation and more fear of rising interest rates that carried the day. Higher interest rates make stocks less attractive investments compared with bonds while raising borrowing costs for consumers and businesses.
Some traders seized on one part of the producer prices report -- intermediate goods and crude goods, essentially commodities such as oil and products early in the manufacturing chain -- which showed gains larger than the overall index. Prices for crude products, including oil, rose 5.5 percent in May and are 36.1 percent above where they were three months ago. But when compared on a year-over-year basis, they are still down by 4.4 percent.
Merrill Lynch chief economist Bruce Steinberg noted in a bulletin that the gains in commodity prices such as crude oil and metals are largely the result of an improving world economy, but are unlikely to spark a wholesale return of inflation.
"Despite the bond market's fear of inflation, price pressures remain notable by their absence," he said.
The next significant measure of the economy comes Wednesday with the release of the May consumer price index. In April, the CPI rose by a surprisingly strong 0.7 percent, but that was widely considered an aberration because of some one-time factors affecting the prices of tobacco, clothing and energy prices. Since then, prices for oil-based products have retreated somewhat.
All in all, economists said it is likely the Fed will raise rates a notch, but that alone will not derail what is close to becoming the longest peacetime economic expansion in history.
"A bump up in rates in either June or August may be necessary, but that won't cause the sky to fall," said Oscar Gonzalez, an economist with John Hancock Life Insurance Co. in Boston. "We are still closer to Goldilocks than Chicken Little."