Renewed rate fears dampen markets

NEW YORK » Stocks closed lower yesterday as the latest batch of upbeat economic data made investors uneasy about more interest rate increases by the Federal Reserve.

Disappointment over blue chipProcter & Gamble Co.'s lower-than-forecast revenue saddled the Dow Jones industrial average and countered solid earnings fromQwest Communications International Inc. and an improved outlook atQualcomm Inc., 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 atBarclays Global Investments, said the high level of oil prices is putting pressure on consumer spending, and he added that rising Treasury yields also created a 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, or 0.14 percent, at 11,400.28, after losing as much 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, or 0.41 percent, to 1,307.85, and the Nasdaq composite index dropped 5.87, or 0.25 percent to 2,303.97.

Oil and gasoline futures tumbled following a government report that gasoline demand has been flat over the past month, and that fuel supplies are growing as refineries step 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, where gasoline dropped 8.9 cents to $2.086 per gallon.

The threat of rising interest rates dragged on bonds, with the yield on the 10-year Treasury note climbing to 5.14 percent from 5.11 percent late Tuesday. The dollar rebounded slightly against other major currencies, and gold prices sat near $670 per ounce.

Ken McCarthy, chief economist for vFinance Investments, said bond weakness could persist as traders remain unsettled about Fed Chairman Ben Bernanke's stance on inflation. But despite yesterday's decline, McCarthy said he is positive about the market's underlying strength.