Stocks Slide on Fears of Rate Hike

U.S. stocks, bonds and the dollar fell in volatile trading Thursday after a report of robust U.S. economic growth also showed an unexpected jump in a key measure of inflation -- one that could push the Federal Reserve to raise interest rates sooner rather than later.

The Dow Jones industrial average fell 70.33 points, giving the index a two-day drop of more than 200 points, and all three major indexes fell to their lowest levels in more than a month.

The nation’s gross domestic product rose at an annual rate of 4.2% for the first three months of the year, the Commerce Department said, up slightly from the 4.1% rate in the final quarter of 2003. Economists had expected a 5% increase.

Even so, the personal consumption expenditures price index (excluding food and energy), shot up to 2%, from just 1.2% in the fourth quarter of last year. The index is a key measure of inflation that Fed Chairman Alan Greenspan is known to monitor.

Still, the lower-than-forecast GDP growth made for an erratic trading day that saw wild fluctuations in stocks and Treasuries from positive to negative.

The Dow fell 0.7% to 10,272.27, its lowest level since March 26. It fell 135.56 points Wednesday.

Broader stock indicators also fell sharply Thursday. The Standard & Poor’s 500 index lost 8.52 points, or 0.8%, to 1,113.89, also the lowest level since March 26. The Nasdaq composite index dropped 30.76 points, or 1.6%, to 1,958.78, its lowest level since March 24.

Bond prices fell, sending yields higher. The yield on the benchmark 10-year note rose to 4.54%, up from 4.50% on Wednesday. The dollar fell as traders bet that the Fed might not be as quick to raise rates as anticipated after the Commerce Department report showed below-forecast U.S. growth.

The increased volatility may remain until the Fed meets to discuss rates Tuesday. Greenspan has hinted that higher rates will be needed to keep the economy from growing too fast.

On Wall Street, technology shares extended their losses after Google, the world’s most-used Internet search engine, filed to raise as much as $2.7 billion in an initial share sale.

“You can’t deny that this may be one of those events you look back on that signaled at least a short-term top in the tech rally,� said Chris Tucker, head of stock trading at HSBC Securities USA in New York. “That’s in the back of every trader’s mind.�

JDS Uniphase had the steepest drop in the S&P; 500, tumbling 61 cents, or 16%, to $3.25. The maker of parts for fiber optic networks said that excluding certain items, it would lose 1 cent a share in its fiscal fourth quarter ending in June. On that basis, the average estimate of analysts surveyed by Thomson First Call was break-even.

Cisco Systems, the biggest maker of computer-networking gear, declined 46 cents to $21.91.

LSI Logic fell 85 cents to $7.57. The maker of chips used in DVD and video game players said that sales this quarter might be as little as $455 million, less than the $472-million average estimate of analysts surveyed by Thomson First Call.

Other chip makers’ shares slid. Texas Instruments fell $1.29 to $25.43. National Semiconductor lost $1.65 to $41.30.

BMC Software Inc., whose programs manage computer networks and call centers, lost $1.45 to $18.05. Excluding some costs, the company’s fourth-quarter profit would have been 18 cents, falling short of the average 23-cent estimate in a Thomson poll.

Declining issues outnumbered advancers by more than 3 to 1 in heavy trading on the New York Stock Exchange.

In other market highlights:

* Exxon Mobil fell 58 cents to $42.54 after reporting a 23% drop in profit from a year ago. The oil firm nonetheless beat analysts’ expectations by 8 cents a share.

* Media giant Time Warner saw its income double in the first quarter because of strong film and TV results. Time Warner, which surpassed Wall Street estimates by 6 cents a share, gained 46 cents to $16.97.

* Consumer products maker Gillette rose $2.50 to $41.28 after the company reported a 43% increase in first-quarter profit from strong sales of its shaving, oral care and battery products.

* Dow Chemical saw a sixfold rise in profit from a year ago, beating Wall Street estimates by 7 cents. The company also plans to cut 3,000 jobs this year. Its shares skidded $1.37 to $39.55.

Market Roundup, C6