Two government reports Tuesday raised fears on Wall Street that the Fed might have increase interest rates again.
J-W Wire Reports
New York -- Stocks were mixed Tuesday as government reports showing unexpectedly strong retail sales and a soaring trade deficit rekindled concerns that the Federal Reserve would raise interest rates for a third time this year.
The Dow Jones industrial average closed down 120.00 at 10,910.33, but the technology-heavy Nasdaq composite index posted a modest gain, rising 23.52 to 2,868.29. Bond prices retreated, driving the yield on the 30-year Treasury to 6.12 percent.
Most stocks were undercut by a Commerce Department report that showed retail sales surged 1.2 percent in August, the biggest increase in six months.
The increase was nearly twice what economists had anticipated, and it fueled worries that the Fed will increase interest rates again in a continuing bid to cool off the U.S. economy and keep a lid on inflation.
The Fed already has boosted short-term interest rates twice this summer, and many economists said those two increases would have been enough to slow consumer spending. But the buoyant U.S. economy, with high employment levels and rising wages, has left consumers highly optimistic.
"The market is fearful of the continued strength of the economy," said Robert Stovall, president of Stovall/Twenty-First Advisers. "Consumers are spending up a storm, blithely ignoring the rise in interest rates."
Also Tuesday, the Commerce Department said the U.S. trade deficit soared to a record $80.7 billion in the second quarter. That news prompted the dollar's latest slide against the Japanese yen, to as low as 105.25 yen compared with 106.44 yen late Monday in New York. As recently as May, the dollar bought more than 124 yen.
The dollar is now at its lowest level against the yen since May 1996. A weaker dollar can hurt stocks by encouraging foreign investors to put their money in investments in their own countries. It also makes imported goods more expensive, adding to inflationary pressures.
The stream of bad economic news hit bonds hard, sending the yield on the 30-year Treasury bond climbing to 6.12 percent from 6.05 percent late Monday. Escalating bond yields can also hurt stocks by presenting a guaranteed, stable rate of return.
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