NEW YORK (CNNfn) - U.S. financial markets suffered severe losses Thursday after data hinted at rising inflation and sent investors running for the exits, fearing the Federal Reserve might live up to Alan Greenspan's recent warnings and raise interest rates before too long.
The Dow Jones industrial average tumbled 180.78 points, or 1.65 percent, to 10,791.29. Losers trounced gainers 2,240 to 797 as 767 million shares changed hands on the New York Stock Exchange.
The Nasdaq composite index plunged 65.83 points, or 2.4 percent, to 2,640.01. The S&P 500 index lost 24.37, or 1.8 percent, to 1,341.03.
Fear of rising interest rates, a byproduct of likewise unwelcome inflationary pressure, also drove the bond market sharply lower. The bellwether 30-year Treasury bond lost 26/32 in price, its yield climbing to 6.07 percent from Thursday's closing level of 6.01 percent.
The dollar, which normally would benefit from higher interest rates, also lost ground against both the yen and the euro amid the general flight out of dollar-denominated stocks and bonds.
Wages surge, GDP slows
Shortly before Wall Street opened, investors learned that the economy grew at a rate of 2.3 percent in the second quarter, lower than both the previous quarter and market expectations for the current period.
But what really spooked financial markets was news that the employment cost index (ECI), a broad measure of employment costs including wages and benefits, jumped 1.1 percent in the second quarter, compared to expectations for an increase of less than 1 percent.
The ECI report, a gauge of labor inflation and an indicator known to be closely watched by Federal Reserve Chairman Alan Greenspan, came only a day after the Fed chief repeated his warning that the central bank is ready to act "forcefully" and raise interest rates at the first sight of rising price pressures. The rate-setting Federal Open Market Committee will meet Aug. 24, and some on Wall Street have begun to speculate the meeting could produce a rate increase.
In almost nine years of robust economic expansion, productivity gains have helped offset inflationary pressure, particularly in the crucial arena of wages. This, in turn, has allowed the Fed to leave interest rates relatively low and stable -- the central bank even adopted a neutral bias following its last interest rate increase in June to signal its willingness to watch and wait.
Rate sensitive stocks suffer
In the stock market, financial services and technology issues, both heavily linked to the direction of interest rates, staged the fastest and deepest retreat.
While rising rates would mean less business for banks and other lenders, technology companies -- which rely on borrowing for their rapid expansion -- also stand to lose if the cost of money goes higher.
Among the Dow's financial components, American Express (AXP) declined 2-11/16 to 138-9/16, Citigroup (C) fell 1-9/16 to 45-13/16 and J.P. Morgan (JPM) lost 3-3/8 to 130-5/8.
The two leading technology components of the Dow 30, IBM and Hewlett Packard, also added to the blue-chip index's losses. IBM (IBM) fell 3-1/4 to 125-1/8 and Hewlett Packard (HWP) dropped 3-7/16 to 106-1/2.
Their decline was followed by losses in other technology leaders, with Microsoft (MSFT) shedding 3-1/16 to 86-15/16 and Cisco Systems (CSCO) easing 1-9/16 to 61-3/4.
Earnings cut both ways
Despite the overall bearish tone in the market, strong second-quarter earnings helped several major stocks avoid the selling spree and crawl higher while investors roundly punished companies that failed to meet the grade.
Shares of Dow member Procter & Gamble (PG) climbed 1-3/4 to 87-7/8 after the household products maker reported second-quarter results that exceeded market expectations.
Manufacturer 3M (MMM) also beat market forecasts with its second-quarter earnings, climbing 1-11/16 to 90-13/16 in one the Dow's few other bullish moves.
However, shares of German-American automaker DaimlerChrysler (DCX) plunged 7-7/16 to 77-9/16 after its operating earnings slipped to $1.57 per share and revenue grew more slowly than analysts had expected.
Dow telecom issue AT&T (T) slid 1-7/16 to 53-1/2 even though its second quarter came in narrowly ahead of analysts' estimates, while estimate-matching profits weren't enough to keep long-distance rival MCI WorldCom (WCOM) from falling 2-9/16 to 84-1/8 on the Nasdaq.
Elsewhere in the telecom sector, shares of long-distance provider Sprint (FON) gained 2-3/4 to 54 following reports that Deutsche Telekom (DT) is interested in the company. American depositary receipts of the German communications firm slid 1-3/8 to 39-5/8.
Also in the news, shares of Apple Computer (AAPL) edged down 1/2 to 53-7/8 even following news that the company is so optimistic about sales of its upcoming iBook portable computer it has taken a $100 million stake in flat-screen manufacturer Samsung Semiconductor to ensure a steady supply of display units.
Apple's deal with America Online (AOL) to develop a product that would enhance the ability to use AOL's Instant Messenger service also failed to help the computer company's Wall Street fortunes. However, shares of AOL fell 3-1/2 to 99-1/4.
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