NEW YORK (CNN/Money) -
Fears of inflation plagued stocks Thursday, leading to a second straight day of declines, after the government announced the highest jump in producer prices in 13 years, but the major indexes all closed within range to end their second week in a row higher -- if they can eke out gains Friday.
After digesting a slew of economic news including data on wholesale prices Thursday, investors will get a dose of consumer prices Friday.
The Dow Jones industrial average (down 85.64 to 7914.96, Charts) fell 1.1 percent Thursday, while the S&P 500 index (down 8.03 to 837.10, Charts) declined about 1 percent. The Nasdaq composite (down 3.09 to 1331.23, Charts) held losses to 0.2 percent, as declines were buffered by some positive chip news. The Dow would need to gain about 7 points Friday to close higher for the week, while the S&P would need a rise of 3 points. The Nasdaq would need to win back the most points, at 22.
"I think the markets are basically making time as a result of the Iraq situation," said Michael Carty, principal at New Millennium Advisors. "The negatives are being played up, and the positive things not absorbed. With a modest resolution to some of these things we might see a market rally."
The weak economic data Thursday only increased investors' worries about the stability of the economy beyond war fears.
The Producer Price Index, a key measure of prices at the wholesale level, jumped 1.6 percent in January -- the biggest rise since January 1990 -- and even excluding often volatile food and energy prices, "core" producer prices rose 0.9 percent, compared with an expected 0.1 percent gain. Rises in producer pricers often bring up worries of inflation.
Meanwhile, the Labor Department said jobless claims for the week ended Feb. 15 rose to 402,000 from 377,000 the previous week and well ahead of the 385,000 economists surveyed by Briefing.com expected.
The government also said the trade balance for December came in at a negative $44.2 billion compared with expectations of a negative $38.6 billion. That raises chances that fourth-quarter gross domestic product will be revised lower, and may mean the economy contracted in the fourth quarter.
Separately, the Philadelphia Fed said its index survey of manufacturing conditions within the region fell to 2.3 in February, down from 11.2 in January and below the 11.0 level expected by a consensus of economists. Although a larger decline than expected, any number over zero indicates growth.
"The economic news today wasn't good -- obviously it leads to worries of inflation," said Peter Cardillo, director of research at Global Partners Securities. "But that should have been expected, with oil and metals trading higher. It has to translate into inflation. The market continues to drift in a sea of uncertainty -- the geopolitical issues are still the main concern."
As they did Thursday, all three indexes lost ground Wednesday, after two consecutive sessions of gains, as fears that a war with Iraq might be unavoidable crept back into news reports. The New York Stock Exchange logged its lightest volume of the year so far Wednesday, at just under 1.1 billion shares traded.
Low volume helped a two-day rally Friday and Tuesday, but the rally's gains were largely neutralized Wednesday, as investors' fears of a potential U.S.-led attack on Iraq came back into the forefront. Reports Wednesday of cargo ships that left a port days after U.N. weapons inspectors began searching in Iraq, and that British Prime Minister Tony Blair might be looking to postpone an attack in order to persuade more countries to get on board, weighed on hopes of a peaceful solution to the tensions.
"The low volume confirms that everyone is sitting on their hands," Cardillo added. "They don't want to venture until there is clarity on the Iraq situation."
In the latest geopolitical news, Secretary of State Colin Powell said he expected an answer from Turkey later today on whether it would allow the United States to use some military bases in the country, should it attack Iraq. Also, the United Nations will reportedly present a second resolution on the situation in Iraq sometime next week.
Meanwhile, investors will have even more economic data to take in Friday.
Before the opening bell, the government plans to release its Consumer Price Index data for January. A consensus of economists surveyed by Briefing.com expects the index to rise 0.3 percent from a 0.1 gain in December. The group also forecast the Core CPI to rise 0.2 percent from 0.1 percent in December
Later in the day, the government will release the Treasury budget for January, expected to come in at $10.0 billion from $43.7 billion in December.
Gains in the chip sector helped keep the markets from deeper losses as the Nasdaq fought to hold its ground.
Some chip stocks gained following a lukewarm note on the sector from Merrill Lynch. The firm has shifted its view on the group to slightly positive from negative, saying that valuation is reasonable, if not highly attractive, and that low inventory levels and low capital spending will tend to increase the industry's sensitivity to any improvement in demand.
Among the stocks cited, the ratings for Xilinx (XLNX: up $0.46 to $22.56, Research, Estimates), Semtech (SMTC: up $1.04 to $13.40, Research, Estimates) and Taiwan Semiconductor (TSM: up $0.43 to $7.41, Research, Estimates) have been raised to "buy" from "neutral." Ratings for Intel (INTC: up $0.22 to $17.02, Research, Estimates), the second most active Nasdaq stock, Applied Micro Circuits (AMCC: up $0.15 to $3.56, Research, Estimates) and Vitesse Semiconductor (VTSS: up $0.10 to $2.30, Research, Estimates) were raised to "neutral" from "sell."
The note comes on the heels of Morgan Stanley's upgrade of the sector to "attractive," and ratings on Intel,Texas Instruments (TNX: Research, Estimates) and Xilinx to "overweight" from "equal-weight," Tuesday.
The Philadelphia Semiconductor Index was among the best performing indexes, rising 1.2 percent.
Wireless carrier Nextel (NXTL: up $0.05 to $13.53, Research, Estimates), one of the day's most active Nasdaq stocks, reported earnings of 21 cents per share, 10 cents better than expected and up from a loss a year earlier. The company said it expects fiscal year 2003 earnings of at least 75 cents per share, while analysts are expecting 65 cents per share.
Biotech losses mount
Losses in biotech countered the Nasdaq's chip and telecom gains.
Biogen (BGEN: down $3.20 to $34.96, Research, Estimates), one of the Nasdaq's more heavily-weighted issues, said early Thursday that its psoriasis treatment -- recently approved by U.S. regulators -- has been rejected by their European counterparts. The European regulators are requesting more information that could take the company several years to gather. The stock fell more than 8 percent.
Additionally, drugmaker Cephalon (CEPH: down $2.70 to $49.00, Research, Estimates) said it will earn 20 cents in its current quarter, well below the 32-cent-per-share profit analysts are expecting. Following the news, Lehman Brothers downgraded Cephalon, whose shares fell more than 5 percent Thursday, to "equal weight" from "overweight" and cut its price target to $55 from $60.
Meanwhile, a drop in shares of Baby Bell SBC Communications (SBC: down $1.73 to $21.30, Research, Estimates) weighed on the Dow. Lehman Brothers downgraded the company to "equal-weight" from "overweight." The firm also downgraded the sector to "neutral" from "positive."
DaimlerChrysler (DCX: down $0.27 to $29.63, Research, Estimates) posted a fourth-quarter operating profit and said it expected to lift earnings this year provided economic conditions remain stable in its main markets. But the German-American automaker, two-thirds of the way through a three-year turnaround plan for its U.S. Chrysler unit, cautioned that any increase in political and economic uncertainty might affect its business.
Overseas, most Asian markets closed fractionally lower; European shares ended mostly lower.
Treasury prices rose, leaving the 10-year note yield at 3.86 percent. The dollar edged lower against the euro and the Japanese yen.
Light crude oil futures for April delivery fell 92 cents to $34.74. Gold for April delivery rose $3.10 an ounce to $353.10.
Market breadth was mixed. On the New York Stock Exchange, losers overtook winners 9 to 8 as 1.2 billion shares changed hands. On the Nasdaq, advancers edged past decliners on a volume of 1.3 billion shares.