Stocks stumble on record oil, inflation worries

Wall Street tumbled Tuesday after oil prices spiked to a new record above $129 a barrel and a government report raised investors’ concerns about the impact of inflation on consumer spending. The Dow Jones industrials fell nearly 200 points.

Crude jumped after OPEC’s president was quoted as saying his organization won’t raise its output before its next meeting in September. That sent a barrel of light, sweet crude to a trading high of $129.58 on the New York Mercantile Exchange.

Meanwhile, the Labor Department’s producer price report, which indicated higher energy and food prices might be seeping into other parts of the economy, compounded the concerns raised by higher oil. The department said wholesale inflation edged up by 0.2 percent in April following a 1.1 percent jump in March, but outside of food and energy, prices rose by a faster 0.4 percent — double what analysts expected.

Wall Street is worried that a drop-off in consumer spending could ensue if wholesale price increases are passed along; consumer spending is critical because it accounts for more than two-thirds of the U.S. economy.

Analyst Stephen Leeb believes escalating oil prices have now replaced the health of the financial sector as the market’s biggest worry. He said rising energy creates a “very vicious circle” through the economy, and thinks the government must take some kind of action to bring down prices.

The retreat in major indexes reversed the optimism of last week, when stocks rose on a growing belief that the economy is still managing to plod along despite worries about both oil prices and the global credit crisis. The loss showed that the market has yet to shake off the volatility that has plagued it since the credit crisis began last summer.

The mood on the Street was further depressed Tuesday by sluggish retail reports and comments from Federal Reserve Vice Chairman Donald Kohn that policymakers are inclined to hold interest rates steady.

In early afternoon trading, the Dow fell 194.92, or 1.50 percent, to 12,833.24. The blue chip index was near its lows of the session, its biggest intraday tumble since a 224 point drop on May 7.

Broader market indexes also retreated. The Standard & Poor’s 500 index shed 12.31, or 0.86 percent, to 1,414.32, and the Nasdaq composite index dropped 25.81, or 1.02 percent, to 2,490.43.

Bond prices rose as investors again sought the relative safety of government securities. The yield on the benchmark 10-year Treasury note, which moves opposite its yield, fell to 3.82 percent from 3.83 percent late Monday.

Gold prices were higher, and the dollar was mixed against other major currencies. A barrel of light sweet crude was last up $2.23 at $129.28, while gasoline prices ticked up 5.14 cents to $3.2880 a gallon.

Concerns about rising inflation, spurred by higher prices for commodities, were the topic of a speech by Kohn. The policymaker said he was cautiously upbeat that the economy will recover, and that the central bank “appears to be appropriately calibrated” to manage inflation over the medium term.

Meanwhile, the Federal Reserve Bank of Chicago issued a report that showed U.S. economic activity weakened further in April and reached its lowest level since the 2001 recession.

Data on consumer spending added to the market’s glum mood. The International Council of Shopping Centers and UBS Securities showed chain-store sales fell 0.4 percent during the week of May 17, down from 1 percent the previous week.

Investors also mined earnings reports from Home Depot Inc., Target Corp., and Staples Inc. for clues about consumers.

Home Depot fell $1.26, or 4.4 percent, to $27.62 after it reported first-quarter profit fell 66 percent amid a continued housing slump.

Target reported that profit dropped almost 8 percent on higher costs, but it was still able to beat expectations. Shares fell 23 cents to $54.69.

Staples said profit rose 1.5 percent during the quarter, and reaffirmed its outlook. Shares rose 7 cents to $23.64.

Banking stocks fell after Oppenheimer & Co. analyst Meredith Whitney said she expects the credit crisis to extend into 2009, and “perhaps beyond.” She said firms like JPMorgan Chase & Co. and Citigroup Inc. have set aside $25 billion to cover losses, but might have to set aside about $170 billion by the end of next year.

Citi fell 66 cents, or 2.9 percent, to $22.33. JPMorgan, which held its annual meeting on Tuesday, dropped $1.58, or 3.4 percent, to $44.43.

Mortgage finance firm Fannie Mae was in focus after Senate banking committee leaders late Monday announced they are close to a housing bill deal that would help prevent foreclosures. They also plan to change the way the government oversees both Fannie Mae and Freddie Mac.

Fannie Mae fell $1.16, or 4.3 percent, to $27.80. Freddie Mac declined 67 cents, or 2.5 percent, to $26.34.

Advancers led decliners by a 2 to 1 ratio on the New York Stock Exchange, where volume came to 524.6 million shares.

The Russell 2000 index of smaller companies fell 2.18, or 0.30 percent, to 736.27.

Overseas, Japan’s central bank kept interest rates steady Tuesday amid lingering worries about a global slowdown. Tokyo’s Nikkei closed down 0.77 percent.

In Europe, London’s FTSE dropped 2.90 percent, Frankfurt’s DAX fell 1.47 percent and Paris’ CAC 40 shed 1.70 percent.

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