Inflation Fears Halt Stock Rally

Oil prices fell to a nine-week low Monday with the surprise transition of sovereignty in Iraq and the end of an oil strike in Norway.

On Wall Street, however, early optimism over the transfer of power was overshadowed by renewed fears of inflation, cutting off a rally and leaving stocks modestly lower.

The inflation fears were fueled by data showing increasing price pressures in a May consumer spending report.

The news helped drive Treasury bond yields sharply higher. The 10-year T-note jumped to 4.74% from 4.65% on Friday. The two-year T-note rose to 2.86% from 2.74%.

On Wall Street, the Dow Jones industrial average was up as many as 93 points early in the day but faded in the final two hours. The Dow closed off 14.75 points, or 0.1%, at 10,357.09.

The Standard & Poor’s 500 index was down 1.08 points, or 0.1%, at 1,133.35, and the Nasdaq composite index eased 5.65 points, or 0.3%, to 2,019.82.

The transfer of power two days ahead of schedule in Iraq helped buoy the market at the start of trading.

Falling oil prices also cheered traders. Near-term crude futures in New York slumped $1.31 to $36.24 a barrel, the lowest since April 21.

In Norway, Statoil and ConocoPhillips said oil production returned to normal after the government Friday halted a strike that cut more than 10% of output from the world’s third-largest exporter.

But the inflation numbers in the consumer spending report raised the prospect that the Federal Reserve could be compelled to raise interest rates at a faster-than-expected pace this year.

Most economists still say the Fed’s initial hike in its base short-term rate will be a quarter-point, from 1% to 1.25%. The central bank is expected to make that move on Wednesday, when it completes a two-day meeting. It would be the first rate increase since 2000.

“It doesn’t change anything for June, but it is the first step toward a [half-percentage-point] move in August� by the Fed, said Brian Edmonds, the head of Treasury and agency debt trading at Banc of America Securities in New York.

Among Monday’s market highlights:

* Energy stocks fell with oil prices. Occidental Petroleum lost $1.15 to $47.41, Noble Energy slid $1 to $49.25 and Murphy Oil sank $2.23 to $70.22.

* Home builders’ shares pulled back as bond yields rose. KB Home fell $1.55 to $67.55 and Ryland dropped $2.59 to $77.31.

* AT&T; was off 20 cents to $14.42, a 52-week low. Moody’s Investors Service said it might cut the telecom giant’s bond ratings to “junk� status.

* Interest-rate-sensitive stocks were mixed even as bond yields jumped. Bank of America rose 72 cents to $84.72 and Wells Fargo added 22 cents to $57.75, while Goldman Sachs lost $1.29 to $93.26. Countrywide Financial gained 41 cents to $71.50, a record high.

But after regular trading ended, Washington Mutual warned that 2004 earnings would fall well below expectations because of rising rates. The company’s stock, up 13 cents to $41.31 in regular trading, fell to $36.50 in after-hours activity.

* Watson Pharmaceuticals of Corona plunged $4.80 to $27.49 after the company said it would miss earnings forecasts in the second quarter because of slow sales of its oral contraceptive products.

* EBay, the largest Internet auctioneer, advanced $2.09 to $92.81. The San Jose company is attracting a growing number of retired and older people looking to sell decades of accumulated possessions before they move to smaller homes, the Wall Street Journal said.

* San Diego-based Titan fell more than 8%, to $13.36, in the wake of defense contractor Lockheed Martin’s weekend decision to end its $1.66-billion buyout deal after Titan failed to resolve a federal investigation of alleged bribery. Titan had already lost more than $4 a share Friday. Lockheed fell $1.18 on Monday to $50.79.

* Lions Gate Entertainment, co-distributor of Michael Moore’s documentary “Fahrenheit 9/11,� rose to a 52-week high of $7.15 during trading, after the film opened over the weekend as the top-selling movie. But the shares ended at $6.80, off 10 cents. They are up 52% this year.