Stocks Battered by Inflation, Growth Fears

Investors were spooked by hawkish comments from Fed officials and a report showing a slowing services sector

Stocks skidded on Wednesday, with the S&P 500 and Nasdaq suffering the biggest one-day percentage declines in almost six months, after a reading on the services sector was weaker than expected and the prices component surged. This follows hawkish comments about inflation from Federal Reserve governor Richard Fisher on Tuesday. Uncertainty about third-quarter earnings also weighed on sentiment.

The Dow Jones industrial average fell 123.75 points, or 1.19%, to 10,317.36. The broader Standard & Poor's 500 index was down 18.08 points, or 1.49%, to 1,196.39. The tech-heavy Nasdaq composite index lost 36.34 points, or 1.7%, to 2,103.02.

In particular, small-cap stocks got slammed, as the Russell 2000 index plunged 2.84%.

The ISM Non-Manufacturing index, which for the most part tracks services businesses, fell to 53.3 in September after jumping to 65.0 in August. That's weaker than expected, but despite the slowdown, the activity index continues to show growth, says Action Economics. Prices paid surged to 81.4 from 67.1, new orders dropped to 56.6 from 65.8 (a two year high), and employment declined to 54.9 from 59.6. "Despite the slowdown in activity, the jump in the prices paid may limit enthusiasm from bond bulls and dollar bears," says Action Economics.

In the energy markets, November West Texas Intermediate crude oil prices tumbled $1.11 to $62.79 a barrel. Front-month gasoline shed 11 cents to end at $1.91 a gallon. Larger than expected draws on weekly inventories of both gasoline and distillates supported prices in early trade, though record imports of refined products, along with signs that high prices are finally having an impact on demand ultimately weighed on prices, says Action Economics.

The EIA reported a 300,000 barrel draw in crude stocks, vs. market expectations for a modest 100,000 barrel draw. Gasoline stocks fell a larger than expected 4.3 million barrels, vs. the Street's forecast for a 2.3 million barrel decline.

Among stocks in the news, ADC Telecommunications (ADCT ) warned that it sees lower than expected fourth-quarter results because of weaker demand for FTTX products, and lower-than-expected sales in amplifiers and services to wireless customers.

Delphi (DPH ) prepared to file for bankruptcy as early as this week, lining up lawyers and consultants in preparation for what would be domestic auto industry's largest filing in recent times, reports The New York Times.

Wendy's International (WEN ) posted 5% lower third-quarter (preliminary) same-store sales. The fast food chain says sales at all brands were impacted by record high gasoline prices, lower consumer spending levels, and store closings from hurricanes.

Treasury Market

Treasury yields finished slighly lower, as the market rebounded from lows as stocks fell and asset allocation trades drove traffic back into Treasuries, says Action Economics. The bond market was also positioning for the September labor report on Friday. The yield on the 10-year note fell to 4.36%.

World Markets

European stock markets finished lower on Wednesday.

London's Financial Times-Stock Exchange 100 index was down 66.6 points, or 1.21%, at 5,427.8. UK consumer confidence fell to the lowest level in 17 months in September, according to a Nationwide survey. A significant correction in crude oil prices was used as excuse to sell energy stocks, says Standard & Poor's MarketScope.

Germany's DAX index fell 68.6 points, or 1.34%, to 5,069.42. In Paris, the CAC 40 index lost 56.13 points, or 1.21%, to 4,594.11.

Asian markets finished lower on Wednesday. In Japan, the Nikkei 225 index fell 48.95 points, or 0.36%, to 13,689.89 as the big drop on Wall Street Tuesday inspired some to take profits. Banks and exporters, which enjoyed some of the biggest gains in recent days, led the market lower, says Standard & Poor's MarketScope.

Hong Kong's Hang Seng index tumbled 221.18 points, 1.44%, to 15,161.03, as the market was hurt by U.S. Fed governor Fisher's hawkish comments about inflation. This raised concerns of more rate hikes in Hong Kong, which tends to keep pace with the U.S. Federal Reserve, says Standard & Poor's MarketScope.

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