Stocks Beaten Beige and Blue

A Fed report confirming slowing economic growth created jitters among investors

Stocks spent most of Wednesday's session neutral, but took a dive as data from a Federal Reserve report showed growth slowed in April and May, with manufacturing, retail sales and commercial real estate markets all softening.

Investors sold off stocks on the Fed's Beige Book data, a survey of national economic conditions, which were released around 2:00 p.m. ET. The Dow Jones Industrial Average lost 76.76 points, or 0.70%, to 10,871.62. The Nasdaq Composite sagged 48.32 points, or 2.23%, to 2,121.63. The broader S&P 500 index lost 14.26 points, or 1.14%, to 1,241.59.

"We've been getting guidance from the Fed and its governors that any recovery in the economy will not be visible until the fourth quarter. As such we shouldn't be looking at the Beige Book to tell us anything more than what the Fed has already been telling us," says Charles White, president of money management firm Avatar Associates. He does not expect any concrete evidence of a recovery until July or August.

White notes that the Beige Book data calls into question the reliability of Wednesday morning's retail figures. U.S. retail sales rose 0.1% in May, as most expected, despite the gloomy corporate picture. In April, sales were shown to rise a revised 1.4%, up from the 1.1% previously reported.

For the next several weeks, warnings of earnings shortfalls should keep much of Wall Street treading carefully. Finland's Nokia Corp. (NOK ), the world's No. 1 mobile phone company, sent stocks lower at the outset of trading Tuesday with its profit warning.

An upcoming "triple witching" effect, the quarterly simultaneous expiration of stock options, index options and futures contracts, is adding to the choppy trading.

Interest rate cuts fromt he Fed have driven short-term rates sharply lower, but the central bank has left the door open for more, if needed. "I think there's a 50-50 chance that the Federal Reserve will recommend another interest rate decrease at their meeting at the end of this month, but it's still rather early to make a definite call," Howard Kornblue, manager of Pilgrim Magna Cap Fund (PMCFX ) told S&P's Advisor Insight. Kornblue cautioned that another rate cut "would be an admission by the Fed that the economy is not really improving."

Among today's stocks in the news, telecommunications gear maker Lucent (LU ) is likely to trade lower after rating agency Standard & Poor's cut its ratings on the troubled company's debt to "junk" status.

Media reports suggested that talks between Dow member General Electric's Jack Welch and European Competition Commissioner regulator Mario Monti over the U.S. conglomerate's merger with Honeywell hit a wall, dampening GE's shares late in Wednesday's session.

Investors took bites of Philip Morris Co.'s (MO ) initial public offering of Kraft Foods Inc. (KFT ) division, which makes Kool-Aid drink mix and Oreo cookies. Kraft Foods raised $8.7 billion in the second-largest U.S. initial public offering ever. The shares were trading near their offering price of $31.

Treasury Market

U.S. Treasuries finished lower following the Beige Book report

The weakness evident in this report is bullish for Treasuries, notes S&P economic research unit, but may not fully suggest a 50 basis point rate cut is in order for the June 26-27 meeting of Fed policymakers, considering the 250 basis points reductions already in the pipeline and the tax cut.

In other data, U.S. import prices rose 0.3% in May and were down 0.2%, excluding petroleum. April import prices were revised lower to a decrease of 0.6% from 0.5% previously. Petroleum prices were up 5.5%. Export prices fell 0.3% after a revised 0.1% decline. These data still support a benign inflation outlook.

World Markets

European markets finished higher. In London, the Financial Times 100 ended higher by 16.20 points, or 0.28%, to 5,820.20, after the government reported unemployment claims fell 3,200 in May to a 26-year low and the jobless rate remained at 3.2%, while U.K. annual wages rose 5.2%. Germany's DAX Index ended higher by 52.79 points, or 0.87%, at 6,111.94, amid a report German that retail sales rose much higher than expected 5.0% in April, its first gain in 3 months. In France, the CAC 40 finished up 41.69 points, or 0.78%, to 5,353.63.

Asian equity markets ended lower. In Japan, the Nikkei 225 Index ended Friday down, losing 16.65 points, or 0.13%, to finish the session at 12,823.45. Hong Kong's Hang Seng index lost 3.37 points, or 0.02%, to 13,523.31.

By Amy Tsao in New York

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