US stocks: Market sinks as Fed cites inflation pressures

NEW YORK - US stocks tumbled on Tuesday as investors were unnerved by comments from the Federal Reserve that inflation pressures had picked up, as it hiked rates by a quarter point, as expected.

The comments sparked fears of more aggressive rate hikes ahead, pushing US benchmark Treasury yields to their highest level in eight months, and weighing on rate-sensitive stocks such as banks. Citigroup Inc. was 2.8 per cent lower.

The worries pushed the Dow and the S&P 500 to their lowest closing level since Jan. 28, and the Nasdaq to its lowest 2005 close -- its weakest since Nov. 2.

The Dow Jones industrial average was down 94.88 points, or 0.90 per cent, to end at 10,470.51. The Standard & Poor's 500 Index was down 12.07 points, or 1.02 per cent, to close at 1,171.71. The Nasdaq Composite Index was down 18.17 points, or 0.91 per cent, to finish at 1,989.34.

While the Fed retained its commitment to gradual increases in the cost of borrowing, it said in a statement that "pressures on inflation have picked up in recent months. "

"I think the tone definitely changed -- this was a much more hawkish statement on inflation than I think pretty much anyone was expecting," said John Caldwell, chief investment strategist at McDonald Financial Group, part of KeyCorp.

"The Fed upgraded their assessment of how the economy is doing, with output being 'solid,' but also upgraded their inflation outlook. "

He added that "the market is reading that the Fed has some work to do to cool off some of these inflationary pressures and that opens the door to possibly more aggressive rate hikes, which the market apparently does not want. "

The yield on the 10-year Treasury note shot up to 4.63 per cent, the highest reading since July. Meanwhile, the dollar surged against the euro and the yen.

Among interest-rate sensitive sectors moving lower were banks and mortgage lenders. Citigroup fell almost 3 per cent, or US$1.32, to US$44.44, while J.P. Morgan Chase & Co. slid 2 per cent, or 73 cents, to US$35.06. The Philadelphia KBW Bank Index fell 1.76 per cent.

Mortgage lenders such as Washington Mutual Inc. fell 71 cents, or 1.8 per cent, to US$39.71.

The rate worries overshadowed the positive benefit of a 2.5 per cent drop in crude oil prices. Crude for May delivery settled at US$56.03 a barrel, down US$1.43.

High oil prices hurt consumer spending and corporate profits, so a fall in crude generally helps stocks.

Among other stocks moving, Altria Group Inc., parent of cigarette maker Philip Morris USA, rose 27 cents to US$63.55, while the S&P tobacco index gained 0.34 per cent.

US government lawyers have begun talks with cigarette makers to try to settle the government's racketeering case against the industry, a source close to the case said.

Some semiconductor companies rose, including Marvell Technology Group Ltd. after UBS raised its rating on Marvell and two other semiconductor companies to "buy," citing improving industry fundamentals. Marvell rose nearly 4 per cent, or US$1.31, to US$37.04 on Nasdaq.

In other news, drugmaker Wyeth rose nearly 4 per cent, or US$1.49, to US$40.40 after it said it expects first-quarter earnings per share to exceed Wall Street expectations.

Electronic Arts Inc., the world's largest video game maker, fell 16.9 per cent, or US$11.20, to US$55.15 a day after it warned of weaker-than-expected earnings.

Overall, trading was active, with 1.68 billion shares changing hands on the New York Stock Exchange, above the 1.46 billion daily average for last year. About 1.86 billion shares were traded on Nasdaq, above the 1.81 billion daily average last year. Decliners outnumbered advancers on the New York Stock Exchange by about 3 to 1 and by 3 to 2 on Nasdaq.

- REUTERS