The US Stocks Nosedive on the fear of Fed Rate Hikes:
The Amex Oil Index down:
U.S. stocks suffered the biggest loss since July,2006 after the government said second-quarter labor costs climbed, reviving concern that the Federal Reserve will limit growth by raising interest rates on its next meet on 20th September, to curb inflation.
The Standard & Poor's 500 Index lost 12.99 points, or 1 % , to 1300.26, the biggest drop since July 13,2006. The Dow Jones Industrial Average slid 63.08 points, or 0.6 % , to 11,406.20. The Tech heavy, Nasdaq Composite Index retreated 37.86 points, or 1.7%, to 2167.84. That's the worst decline since July 20. The Russell 2000 index of smaller companies fell 15.46 points, or 2.13 %, to close at 712.04.
A Labor Department report which said that wages rose at an annual rate of 4.9 %, in the second quarter, above the 4.2 %, the agency estimated, the biggest back-to-back increase since 2000, was as an unpleasant surprise by the markets that had reached three-month highs, on hopes of stable rates. For the first quarter, the department said labor costs jumped 9%- the largest quarterly rise in almost six years. Labor costs rose 5 %, in the past 12 months, the biggest year-over-year increase since 1990, the Labor Department said, after a 3.6 % gain in the first quarter.
Hours worked rose at a 1.5 % pace in the second quarter, compared with the 1.4 % the government reported earlier and a 2.3 % increase in the previous three months. Output increased at a 3.1 % rate after a 6.7 percent first-quarter gain.
Compensation for each hour of work rose at an annual rate of 6.6 % in the second quarter, compared with the 5.4 % pace the government reported last month.
The productivity of U.S. workers slowed last quarter and jumo in labor costs, challenging the Federal Reserve's forecast that inflation will cool along with the economy.
Productivity, a measure of employee efficiency, increased at an annual rate of 1.6 % after a 4.3 %, gain the prior three months, according to the Labor Department.
The market also found little solace in a report from the Institute for Supply Management that showed the services sector grew at a faster pace in August than economists forecast. Many analysts at the Wall street is of the view that an economy still showing this type of growth could make it easier for the Fed to justify a rate hike to fight inflation, in its next meet. The central bank left rates unchanged at its last meeting after a string of 17 straight increases.
Stocks drifted even lower on Wednesday afternoon after its regional survey known as the "Beige book," showed that while economic growth continued in the fall, five of the Fed's 12 districts showed deceleration. The Fed's report on economic conditions in each of its 12 districts indicated that consumer spending rose ``slowly'' in most of the country, and inflationary pressures abated but wage pressures' were reported in some districts. .
The findings that the housing market slowed could also bolster the arguments of some that the economy at large could eventually suffer if consumer spending cools as a result. The U.S. economy slowed to an annual growth rate of 2.9 % in the second quarter, an Aug. 30 government report showed. The increase in gross domestic product, the sum of all goods and services produced in the U.S., compares with the 2.5 % gain initially reported on July 28 and a 5.6 % rate for the first quarter, the Commerce Department said. Fed policy makers are betting that even with higher wage costs, inflation pressures will abate as the economy slows.
``At the end of the day investing in equities is about investing in earnings growth,'' said Robert Weissenstein, who oversees $70 billion as chief investment officer at Credit Suisse Holdings in New York. ``If the Fed got too aggressive it could slow the economy more than expected. It would make it really difficult for stocks.''
``The combination of weaker growth and accelerating wage inflation puts the Fed in a very tough spot,'' said Nariman Behravesh, chief economist at Global Insight Inc. in Lexington, Massachusetts. ``It may be difficult for Mr. Bernanke and his colleagues to take no action as core inflation keeps rising.''
Behravesh predicts the Fed will keep its benchmark rate at 5.25 %, when policy makers meet on Sept. 20, before lifting borrowing costs at either the October or December meetings.
"I think people are still looking over their shoulders in terms of labor costs," said Jon Brorson, head of growth equities at Neuberger Berman in Chicago.
Brorson said he would be cautious about jumping into stocks following the gains seen this summer and that he is surprised the market hasn't ceded more ground. "You've got a situation where the Fed is trying to fine-tune this economy. There's no guarantee they're going to get it right."
``The Fed was giving us a signal that they weren't too concerned about inflation,'' said Kevin Logan, senior market economist at Dresdner Kleinwort Wasserstein in New York. ``And now with this data, it raises the possibility that perhaps they have to be a bit more vigilant.''
The Fed can be ``patient'' in considering whether to raise interest rates again, even while inflation stands above the comfort level of policy makers, St. Louis Fed President William Poole said in an interview yesterday.
The rate-setting Federal Open Market Committee voted 9-1 last month to leave the overnight lending rate at 5.25 percent, ending a run of 17 consecutive quarter-point increases.
The Fed's preferred inflation gauge, the personal consumption expenditures price index minus food and energy, rose 2.4 % in the year ending July, above some policy makers' ``comfort zone'' of a 1 %-2 % increase per year.
Jeffrey Lacker, president of the Richmond Fed, said in an Aug. 30 interview that he doesn't think ``we're out of the woods yet'' on inflation, and slower growth by itself won't be enough to keep a lid on prices. He opposed the Fed's decision to forgo a rate increase.
Employers added 128,000 workers to their payrolls, up from a revised 121,000 in July, the Labor Department reported last week. The jobless rate declined to 4.7 % from 4.8 %.
Job cuts announced by U.S. employers dropped 7.5 % in August from a year earlier, a sign the labor market remains tight, according to a report yesterday from Challenger, Gray & Christmas Inc., a Chicago-based placement firm.
Some companies are still slashing their workforces to boost efficiency and jumpstart profit growth.
The declines in stocks under the weight of economic news came despite recent lows in the price of oil. Crude prices, which have recently been above $70 a barrel, fell amid a temporary easing of tensions in Iran over its nuclear ambitions, an end to the summer driving season as well as news that one Gulf of Mexico platform is now producing 20 %t more than before it was struck by Hurricane Katrina. Crude prices settled down $1.10 at $67.50 a barrel on the New York Mercantile Exchange. The decline hurt oil stocks Wednesday.
Bonds fell on investor disappointment with Wednesday's economic data. The yield on the benchmark 10-year Treasury note climbed to 4.80 % from 4.78 % Tuesday. The yield hit a five-month low of 4.73 percent Friday. The dollar was mixed compared with most major currencies, while gold fell. [With inputs from Internet]
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Suman Mukherjee
India.
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