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Rate fears deck stocks
Major gauges tumble as upbeat July jobs report revives inflation fears ahead of Fed meeting.
August 5, 2005: 6:15 PM EDT
By Alexandra Twin, CNN/Money staff writer

NEW YORK (CNN/Money) - Stocks slid Friday, as the strong July jobs report prompted investors to cash in on the recent rally amid worries that the Federal Reserve will pick up the pace of its interest-rate increases.

The Standard & Poor's 500 (down 9.44 to 1,226.42, Charts) lost nearly 0.8 percent. The Dow Jones industrial average (down 52.07 to 10,558.03, Charts) and the Nasdaq composite (down 13.41 to 2,177.91, Charts) both saw smaller declines. For the week, all three major indexes fell modestly.

A nearly five-week advance hit a roadblock this week, with investors retreating after having pushed the Nasdaq and S&P 500 to four-year highs earlier in the week.

The advance was the second leg of a broader run up that has supported stocks since May, said Barry Hyman, equity strategist at Ehrenkrantz King Nussbaum. As such, a period of consolidation was unsurprising.

"I would characterize this as a correction long in coming," Hyman said. "We're coming off of this tremendous run, plus you've got oil prices near all-time highs and the prospect of higher interest rates through the end of the year, and so you're seeing some profit taking."

He said that the consolidation was likely to continue into next week, particularly as investors gear up for the conclusion of the Fed meeting Tuesday.

Oil prices at record highs and a jump in Treasury bond yields added to the session's weakness.

Treasury prices slumped after the jobs report, raising the yield on the 10-year note to 4.39 percent from 4.31 percent late Thursday. Treasury prices and yields move in opposite directions.

U.S. light crude oil for September delivery rose 93 cents to settle at $62.31 a barrel on the New York Mercantile Exchange, a record closing high.

Strong July jobs growth

Employers added 207,000 jobs to their payrolls in July, according to a government report released Friday morning, versus economists' forecasts for 180,000 new jobs. June's figure was also revised upward to a 166,000 gain.

The unemployment rate, generated by a separate survey, held steady at the 5 percent rate hit in June, in line with forecasts.

Average hourly earnings rose 0.4 percent in the month, well above forecasts.

The overall strength of the report seemed to offer further evidence that the labor market is improving, certainly a positive for the economy overall. However, paired with the rise in hourly earnings -- which sparked inflation worries -- the report left stock investors less than content.

A stronger economy and more inflation points to a continued spike in interest rates.

While the Federal Reserve -- meeting next week -- is widely expected to boost interest rates for a 10th consecutive time, some stock market participants had been betting that the central bank would pause soon.

The strength of the report calls such bets into question.

"The stock and bond markets are looking at the report and seeing the signs of strength, and they know the Fed is doing the same," said Stuart Hoffman, chief economist at PNC Financial Services Group.

"A 25 basis point (quarter percentage point) hike next week is factored into the market, what this does is add to the odds that they'll do another 25 in September, November and December," Hoffman added. "This also creates the fear that the Fed will speed up and start going 50 points at a time, although I don't think that's going to happen.

On the move

Declines were broad based, with 24 out of 30 Dow issues falling.

Economically-sensitive issues, such as homebuilders, were hit hard. The Dow Jones Home Construction (down $48.24 to $1,024.36, Research) index slumped 5 percent.

Pulte Homes (down $2.73 to $89.95, Research), Lennar (down $2.97 to $63.03, Research) and Toll Brothers (down $3.93 to $50.95, Research) were among the homebuilding stocks sliding.

The automakers slid, with General Motors (down $0.86 to $35.19, Research) and Ford Motor (down $0.28 to $10.36, Research) both declining in active New York Stock Exchange trade.

Delphi (down $0.82 to $4.96, Research) slumped 14.2 percent in active New York Stock Exchange trade after the auto parts supplier said it was in restructuring talks with former parent General Motors (down $0.86 to $35.19, Research) and its unions.

Network Appliance (down $0.94 to $24.56, Research), a computer data storage maker, slipped 3.7 percent after warning late Thursday that fiscal first-quarter revenue will miss forecasts.

In earnings news, Pixar Animation Studios (up $3.33 to $44.58, Research) reported lower second-quarter earnings that were nonetheless in line with estimates. The company's CEO also said he was cautiously optimistic about the company's talks for a distribution deal with estranged partner Walt Disney (down $0.14 to $25.48, Research).

A notable gainer was (Research), China's largest Web search company. The price of shares jumped 354 percent on their first day of trading as a public company.

Market breadth was negative. On the New York Stock Exchange, losers beat winners by more than three to one on volume of nearly 1.5 billion shares. On the Nasdaq, decliners topped advancers by two to one on volume of 1.5 billion shares.

In currency trading, the dollar gained versus the euro and the yen.

COMEX gold fell 90 cents to settle at $442.80 an ounce.  Top of page


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