Investors were spooked by a Labor Department report that its consumer price index swelled 0.6 percent in April, topping forecasts of 0.5 percent. But core CPI — without food and energy — also gained 0.3 percent, ahead of estimates and adding to worries that soaring oil prices have begun to lift prices elsewhere.
into law and said it will put more money back into Americans' pockets, but the Dow has now lost more than 400 points since the Fed raised rates last week, reports CBS News correspondent Anthony Mason.
The inflation data dragged bonds lower and overshadowed solid earnings from Hewlett-Packard Co. and cooling oil prices. Wall Street has been extremely anxious about economic news after the Fed said last week that more rate hikes could be needed to battle inflationary pressures from record commodities prices.
"The CPI data really kicked the market in the teeth today," said Ken Tower, chief market strategist for Schwab's CyberTrader. "So the question now really is where can we find some support?"
As the Dow came within 80 points of its best-ever close of 11,722.98 last week, many analysts felt the market was overbought and would soon see a correction. But Tower said stocks are now oversold after several days of steep losses, suggesting that investors may start looking for positive signs to spur buying.
The Dow sank 214.28, or 1.88 percent, to 11,205.61, a one-month low. The blue-chip index was down as much as 245.51 points earlier in the day and logged its biggest single-session slide since falling 307 points on March 24, 2003.
Broader stock indicators also declined. The Standard & Poor's 500 index lost 21.76, or 1.68 percent, to 1,270.32, its lowest close since finishing at 1,262.86 on Feb. 13; the Nasdaq fell 33.33, or 1.5 percent, to 2,195.80, showing a loss for the first time in 2006.
Declining issues led advancers by nearly 5 to 1 on the New York Stock Exchange, where volume of 2.1 billion shares topped the 1.7 billion shares that changed hands Tuesday.
The prospect of higher interest rates hurt bonds, with the yield on the 10-year Treasury note surging to 5.16 percent from 5.1 percent late Tuesday. Last Friday, bond yields reached a four-year high of 5.19 percent.
While Wednesday's retreat reflected Wall Street's ongoing nervousness about interest rates, investors may have gotten ahead of themselves before last week's Fed meeting. Many traders were betting that the central bank would pause its two-year streak of rate hikes, and catapulted the major indexes to fresh multiyear highs.
The Fed boosted rates to 5 percent and left flexibility to pause its rate tightening. However, the Fed cautioned that soaring oil and gold prices pose a threat to inflation and could warrant higher interest rates to stifle demand and keep prices from escalating. The CPI report and Tuesday's producer price index reading reinforced that warning.
Gregory Miller, SunTrust Banks' chief economist, said the market was still largely split on whether the Fed will increase the key short-term lending rate by another quarter percentage point when policymakers meet on June 29.
"It won't surprise me if this is when they decide to start the pause and allow data to accumulate," Miller said. "I suspect what they'll find is energy prices will stop trending higher, and the slower growth numbers will accumulate."
The dollar continued to lose ground to the Japanese yen, and that also weighed on the market's mood, CyberTrader's Tower said. The dollar's retreat could propel inflation since more of the U.S. currency will be needed to purchase foreign-made goods.
"The dollar has depreciated quite sharply since the Fed started talking about stopping its rate hikes," Tower said. "It's not so much that the dollar is depreciating — it's the speed of the depreciation that is worrying the currency market. The dollar is down 6 percent in one month, which is a lot."
Crude futures dipped on data showing U.S. gasoline reserves grew for a third week in a row. A barrel of light crude dropped 84 cents to settle at $68.69 on the New York Mercantile Exchange.
HP was the Dow's sole winner after saying improved sales boosted its profit by 51 percent last quarter. The company also announced plans to consolidate its global data centers in an effort to trim $1 billion in expenses. HP climbed $1.05 to $32.16.
Applied Materials Inc. fell 92 cents to $16.93 despite posting a sharp rise in quarterly earnings, handily beating Wall Street expectations. The chipmaker also forecast results ahead of current estimates.
Xstrata PLC offered to pay $14.5 billion for the 80.2 percent of Canadian mining company Falconbridge Ltd. it doesn't already own, topping Inco Ltd.'s $17.7 billion advance. The $47.19-per-share bid sent Falconbridge shares up $1.16 to $49.94.
Honda Motor Co. plans to build a new U.S. plant — its sixth in North America — as part of $1.18 billion expansion to meet surging demand for its cars. Honda slipped 83 cents to $34.25.
The Russell 2000 index of smaller companies tumbled 11.62, or 1.58 percent, to 725.85.
Overseas, Japan's Nikkei stock average added 0.92 percent. Britain's FTSE 100 lost 2.92 percent, Germany's DAX index sank 3.4 percent and France's CAC-40 was lower by 3.18 percent.
In other economic news, President Bush made new tax legislation official Wednesday, signing a bill that extends the 15 percent capital gains rate and keeps millions of million income families from paying the Alternative Minimum Tax.
One of the things the Fed will be keeping close tabs on is how energy prices affect inflation and economic activity.
Energy prices can make inflation worse. They also can crimp overall economic activity by forcing consumers and consumers to pare their spending and investment. Or, high energy prices can result in both scenarios — which would be an tricky position for the Fed to deal with. To counter inflation, the Fed would be inclined to boost interest rates. To treat economic weakness, the Fed would want to leave rates alone or in more serious cases, lower them.
Oil prices hit a record high of just more than $75 a barrel in late April; they are now hovering close to $70 a barrel. Those high crude oil prices have pushed up prices at the gasoline pumps to $3 a gallon in some areas.
Wednesday's report said that energy prices shot up by 3.9 percent in April. That was up from 1.3 percent in March and was the biggest gain since January. Gasoline prices rose 8.8 percent last month. Fuel oil prices went up 5.2 percent. Electricity prices rose 0.3 percent.
Clothing prices, which increased 0.6 percent, also helped to push up inflation at the consumer level last month. So did airline prices, which went up 1.6 percent, the largest since July. Medical care costs rose 0.4 percent. Costs for shelter, including rent, increased 0.3 percent.
Food prices were flat in April after edging up by 0.1 percent in March.