Stocks ended lower Wednesday after the government reported stronger than expected retail sales. Bond prices moved sharply lower, pushing the yield on the 10-year note up 20 basis points to 4.56% as higher retail sales suggested a recovering economy, casting doubts on another Fed rate cut, according to Standard & Poor's MarketScope.
The Dow Jones industrial average fell 38.1 points, or 0.41%, to 9,272.04, pressured by pharmaceutical stocks and profit taking in Wal-Mart (WMT) after its earnings report. The broader Standard & Poor's 500 index lost 6.32 points, or 0.64%, to 984.03.
Meanwhile, the tech-heavy Nasdaq composite index edged down 0.42 of a point, or 0.02%, to 1,686.59, supported by strength in semiconductor stocks.
The government reported that retail sales popped up a solid 1.4% in July after a revised 0.9% rise in June (up 0.5% initially). Excluding autos, sales were also strong, rising 0.8% after a revised 1% increase in June (up 0.7% initially). Strength was broadbased. The vehicle/parts component was up 3.2%, while electronics store sales were up 1.2% with building materials were up 1.3%. General merchandise sales were up 1.1%.
Economic data due out Thursday include the producer price index, a measure of inflation at the wholesale level, the trade report, and weekly jobless claims.
On the earnings front, watch for quarterly reports Thursday from PC maker Dell (DELL) and chip maker Analog Devices (ADI), along with retailers Target (TGT) and Kohl's (KSS).
Among the sectors on the move Wednesday, pharmaceutical stocks fell as Merck (MRK) and Pfizer (PFE) declined on news that the FDA has approved AstraZeneca's (AZN) cholesterol drug Crestor, which will compete with Pfizer's Lipitor and Merck's Zocor.
Home builders were also down on news that Toll Brothers (TOL) has sold 3 million common shares to Citigroup Global Markets. Investors also worried that higher interst rates will hurt new home sales.
Health-care equipment stocks were weaker after Prudential downgraded Medtronic (MDT) to hold from buy after company posted earnings. The firm cited Medtronic's valuation amid decelerating revenue growth and the increasing potential that the stock will be subjected to sector rotation.
On the plus side, food retailers rallied after JP Morgan upgraded Whole Foods Market (WFMI) to overweight from neutral, saying it believes the stock is poised to outperform its peers and certain related groups over next 6 to 12 months.
Wal-Mart reported second-quarter earnings from continuing operations of 52 cents per share, vs. 45 cents a year ago, on 3.2% total company same-store sales rise and 11% total sales rise. The EPS was in line with analysts' consensus estimate. The retail giant sees third-quarter EPS of 45 cents to 47 cents.
After the market close Tuesday, chip-equipment giant Applied Materials (AMAT) reported earnings of 5 cents per share (excluding charges), beating the consensus estimate by a penny. The company's net loss was 2 cents per share, vs. EPS of 7 cents a year ago, on a 25% revenue drop. The company said new orders of $1.05 billion rose 9% from the second quarter. Applied Materials stated that results for the current quarter would miss the current consensus estimate. Still, the report helped lift semiconductor stocks.
In other news, Berkshire Hathaway (BRK.B) chief Warren Buffett agreed to serve as Arnold Schwarzenegger's economic adviser to the Republican's campaign for California governor.
Treasuries collapsed the day after the Fed held rates pat and signaled that policy would remain accommodative for some time to come. The 1.4% surge in July retail sales underlined the tenuous position the Fed's pre-commitment strategy, while export prices slipped 0.1% and business inventories gained only 0.1%.
Leveraged accounts were only too happy to front-run the back-up in yields, with the 10-year yield moving back above 4.45% to 4.55%, triggering duration-related selling by the mortgage community, says MMS International.
European stock markets were mixed. In London, the Financial Times-Stock Exchange 100 fell 4.9 points, or 0.12%, to 4,180.7, as the number of people claiming jobless benefits unexpectedly fell for the second consecutive month in July. At same time, the Bank of England cut its inflation forecast.
In Germany, the DAX Index gained 17.18 points, or 0.51%, to 3,398.89 after the German cabinet approves tax cuts and welfare reductions in a bid to revive the economy and reduce unemployment. Schroeder said the economy might growth more than the 2% forecast for 2004. In France, the CAC 40 edged down 0.17 point to 3,208.6.
In Asia, major stock indexes finished higher. Japan's Nikkei index finished up 187.94 points, or 1.96%, to close at 9752.75. The positive effect of Tuesday's second-quarter GDP result -- up 2.3% annualized -- remained, plus players in Tokyo were encouraged by overnight gains on Wall Street as well as the Fed's statement suggested the Fed would not be in a hurry of raising interest rates. Major bank and tech stocks rallied.
Meanwhile, Hong Kong's Hang Seng index gained 117.30 points, or 1.15%, to close at 10,301.47.