U.S. Stocks Slide Before Fed

NEW YORK (MarketWatch) - Stock prices declined Tuesday, shifting gears again after the prior day's rally, after the government reported increased labor costs and lower-than-forecast productivity in the last quarter and investors looked for calming words from the Fed.

"A lot of the volatility has to do with anticipation of what the Fed might or might not do," said Paul Mendelsohn, chief investment strategist at Windham Financial Services. "Labor costs are still running at the higher end here, that's something the Fed has to keep an eye on."

The Dow Jones Industrial Average was 55 points lower at 13,414.2, with 22 of its 30 components on the decline, with American Express Co. among the Dow's loss leaders, with its stock down 1.3%.

Automaker General Motors Corp. fronted the Dow's advancing stocks, gaining 1.2%.

The S&P 500 was down 3.76 points at 1,464.61, while the Nasdaq Composite declined 7.75 points at 2,539.58.

Trading volume showed 572.1 million shares exchanging hands at the New York Stock Exchange and 732.8 million shares trading on the Nasdaq stock market. Declining issues bested advancers 3 to 1 on the NYSE, and were by 5 to 4 on the Nasdaq.

Financial factor

Shares of leading U.S. banks and brokerage firms were mixed, with the stock of insurer Assurant Inc. up 3.5% after analysts at Merrill Lynch upgraded Assurant to buy.

Bear Stearns Cos. edged 0.2% higher after slipping earlier after Bloomberg News reported the company's decision to liquidate two bankrupt hedge funds in the Cayman Islands instead of New York might limit creditors' and investors' ability to get their money back.

Lehman Bros. analysts began coverage of private-equity and hedge fund Blackstone Group , giving it an overweight rating. Blackstone's shares gained 1.8%.

Luminent Mortgage Capital Inc. was cut to sell from neutral by UBS. Its stock was off 81%. The lender suspended its quarterly dividend and said it would explore options including a sale.

Fed factor

The highlight of Tuesday's session will be the 2:15 p.m. Eastern Fed rates decision. The central bank is widely expected to leave the key overnight rate at 5.25%.

But many investors suspect that recent problems in the credit markets will force the Fed to note concern about an economic slowdown in its policy statement. For many months the Fed's top worry has been inflation.

Such a change in stance could pave the way for a rate cut in coming months.

Sentiment is likely to be cautious before the statement comes out. "Anything is possible before the Fed because we won't know anything until we see the statement," said Peter Boockvar, equity strategist at Miller Tabak. "

"We need to see the statement to see whether they are more focused on inflation or whether they acknowledge the weakness in the economy and the potential impact of credit problems on the economy," Boockvar said.

The Labor Department reported that productivity in the second quarter rose 1.8%, below the 2.1% gain expected by economists polled by MarketWatch.

The wages and benefits component of the report suggested inflation may remain worrisome. The department said that unit labor costs - a key inflationary signal - rose at an annual rate of 2.1% in the second quarter. Economists had expected a 1.6% gain.

Other market moves

Treasury prices were mildly higher as the market awaited the Fed's interest rate decision, with the benchmark 10-year Treasury note up 1/32 at 98 5/32, yielding 4.738%.

The dollar was mixed ahead of the Fed decision. In New York trade, the dollar was quoted at 118.59 yen, compared with 119.03 yen late Monday. The euro stood at $1.3761, compared with $1.3793.

"The dollar doesn't think the Fed is in a position to lower rates; the 10-year is pretty flat, so it's not giving us any clues," said Mendelsohn.

Gold was under slight pressure ahead of the entral bank announcement. Gold for December delivery last was down $4.30 at $679 an ounce.

Crude oil fell sharply once again, weighed down by a weak opening in stocks as well as ongoing concern that an economic slowdown will lower energy demand. Crude oil for September delivery fell 70 cents, or 1%, at $71.36 a barrel on the New York Mercantile Exchange.

On Monday stocks staged a strong comeback, after suffering a rout at the end of last week when investors dumped shares on fears the credit crunch is spreading throughout the economy.

By Leslie Wines