nasdaq erases two thousand six gain U.S. Stocks Drop on...

nasdaq erases two thousand six gain U.S. Stocks Drop on Inflation Concern; Bank Shares, GM Decline

May 17 (Bloomberg) -- Inflation concerns gripped investors, sending U.S. stocks to two-month lows, after consumer prices rose more than economists forecast last month.

Bank of America Corp. and companies whose earnings are sensitive to fluctuations in interest rates led the decline. Shares of General Motors Corp. paced the drop in the Dow Jones Industrial Average after the world's largest automaker said its chief accounting officer resigned.

Government bond yields jumped on the consumer-price figures as they rekindled concern the Federal Reserve will have to keep raising interest rates to contain inflation.

``Clearly today's data is leading to more interest-rate increases,'' said Eric Thorne, who helps oversee $2.3 billion at Bryn Mawr Trust Co. in Bryn Mawr, Pennsylvania. ``There was the hope in the back of investors' minds that we would start to see more data showing the economy slowing down some so that we would see the end in the tightening cycle.''

The Dow average dropped 149.54, or 1.3 percent, to 11,270.35 as of 12.46 p.m. in New York. The Standard & Poor's 500 Index lost 13.85, or 1.1 percent, to 1278.23, the lowest since March 9. The Nasdaq Composite Index decreased 21.24, or 1 percent, to 2207.89, erasing almost all of its 2006 gain.

The market's retreat mirrored that in Europe, where stocks fell the most in three years on concern central banks will increase interest rates to contain inflation.

`Not Good News'

``Across the board, there's really not a lot of good news,'' said Tim Smalls, head of U.S. trading at Execution LLC in Greenwich, Connecticut. ``GM's doing a management shake-up again to deal with accounting issues. That's not good news.''

Consumer prices increased 0.6 percent in April following a 0.4 percent gain in March, the Labor Department said. Excluding food and energy, so-called core prices rose 0.3 percent. Economists expected 0.5 percent and 0.2 percent, respectively.

Today's report contrasted with one yesterday that showed wholesale prices excluding food and energy rose less than economists expected. The Fed said that it would monitor incoming data in order to set future policy after raising the benchmark lending rate a 16th straight time last week, to 5 percent.

Fed Chairman Ben S. Bernanke ``is taking a wait and see attitude,'' said Scott Black, who manages $1.6 billion as president of Delphi Management Inc. in Boston. ``He will be compelled to raise rates another 25, 50 basis points to choke off inflation'' if future data shows a similar scenario. A basis point is 0.01 percentage point.

Fed Impact

The market has zigzagged with every perceived hint about future interest-rate increases. The S&P 500 had its biggest one- day gain this year on April 18 after minutes from policy makers' March meeting stated that ``most members thought that the end of the tightening process was likely to be near.''

The index had its steepest two-day slide in seven months last week when the Fed failed to indicate a pause was imminent after its May 10 meeting.

The yield on the benchmark 10-year Treasury note rose the most in two weeks, increasing 7 basis points to 5.17 percent after the report, according to bond broker Cantor Fitzgerald LP.

Interest-rate futures showed traders expect a 50 percent chance of the Fed boosting its target rate to 5.25 percent rate on June 29, up from 36 percent before the inflation report.

``Obviously the data this morning did not help the case for a Fed pause,'' said Ryan Larson, an equity trader at Voyageur Asset Management, which manages $8 billion in Chicago. ``The market realizes now there is a lot more uncertainty regarding what the Fed needs to do, and uncertainty in the market is a very bad thing.''

Bank of America, the No. 2 U.S. bank, retreated 94 cents to $48.70. Citigroup Inc., the world's biggest bank by market value, lost 48 cents to $49.06.

GM Declines

GM shares dropped $1.41, or 5.5 percent, to $24.12 for the steepest loss in the Dow average. Chief Accounting Officer Peter Bible resigned, effective June 1, to ``pursue other career options.'' Controller Paul W. Schmidt will retire later this year, and GM will create a new position combining the two jobs.

The changes come as the Securities and Exchange Commission and a federal grand jury investigate GM over precious-metal transactions and credits from suppliers. Also, GM said March 28 that it would restate its financial results since 2002 because of accounting problems at its home-mortgage unit.

Crude oil lost 1.3 percent to $68.60 a barrel after a government report showed U.S. gasoline supplies rose. An S&P 500 energy measure slid 2 percent. Exxon Mobil Corp., the world's largest publicly traded oil company, sank $1.33 to $60.63.

Six stocks fell for every one that rose on the New York Stock Exchange. About 1.03 billion shares changed hands on the Big Board, 45 percent more than the same time a week ago.

Hewlett-Packard

Hewlett-Packard Co. provided one bright spot in the market, climbing $1.18, or 3.8 percent, to $32.39 for the top gain in the Dow average. The world's second-largest personal-computer maker expects fiscal third-quarter profit, excluding some items, of as much as 48 cents a share on sales of $21.8 billion. UBS AG's Benjamin Reitzes estimated earnings of 41 cents on revenue of $21.6 billion.

The company's second-quarter profit rose 51 percent, with the PC unit's earnings jumping 69 percent, as Chief Executive Officer Mark Hurd cut prices.

Advanced Micro Devices Inc., the second-largest maker of computer processors, gained 30 cents to $31.11. The company makes chips for Hewlett-Packard.

Circuit City Stores Inc. rose $1.38, or 4.8 percent, to $30.31 for the second-best performance in the S&P 500. The No. 2 U.S. electronics retailer's Chief Financial Officer told analysts at a conference that first-quarter sales are ``very strong'' through 2 1/2 months of the period.