Stocks finished near session lows as oil prices soared above $129 a barrel and a measure of wholesale inflation surged, sparking worries that the Federal Reserve will start focusing on rising prices rather than slowing growth.
The Dow Jones Industrial Average closed down nearly 200 points, or 1.5 percent. The Nasdaq shed 1 percent, and the S&P 500 index dropped 0.9 percent.
There was weakness in all sectors except pharmaceuticals and energy, as crude oil continued its relentless ascent, jumping $2.02 a barrel to close at a record $129.07. That's the third record close in as many days. The only gainers on the Dow were ExxonMobil and Chevron .
Texas oil sage Boone Pickens threw a little fuel on the fire today, telling CNBC he sees oil hitting $150 a barrel this year.
The producer price index rose just 0.2 percentin April, as the government's gauge of gasoline prices fell. Core wholesale prices, however, which exclude food and energy costs, jumped 0.4 percent, double what economists had expected. Over the past 12 months, core PPI has surged 3 percent, the largest gain since December 1991.
"There was some acceleration in the nonenergy sector with a curious rise in furniture and household durables," Jeoff Hall, chief U.S. economist at IFR Markets, told Reuters. "It may be costing more to ship them and bring them out of warehouses rather than more demand for them." Food prices remained in check in April, but are likely to rise in May, Hall said.
"Nothing here bodes well for consumers," Joel Naroff, president of Naroff Economic Advisors, said. "We are not going to see easing anytime soon."
Economists noted that this report on inflation at the wholesale level, compared with last week's report on consumer prices, shows that businesses have been incurring sharper price increases than they have been able to pass on to consumers.
There is "more pressure on businesses to raise their costs," Naroff said. "This is problematic in an economic slowdown we are in right now. This will have a more negative news for earnings and inflation."
Not that you would know it by today's trading, but investor confidence jumped to its highest level in seven months in May, according to a State Street survey. That was largely due to a jump in confidence among North American investors, while confidence in Europe was flat.
Home Depot, the biggest decliner on the Dow, dropped 5.2 percent after the home-improvement retailer reported its profit plunged 66 percentas the company closed stores and cut back on expansion plans amid the housing meltdown. The company's profit rang up at 21 cents a share including a hefty charge for store closings. Excluding one-time items, Home Depot earned 41 cents a share. Analysts had expected 37 cents a share.
Both Home Depot and rival Lowe's have acknowledged slowness due to housing woes. Some analysts suggested Home Depot beat expectations due to a calendar shift, which skewed sales.
The Home Depot report comes a day after rival Lowe'sbeat earnings expectations but issued a cautious outlookfor the rest of the year. Lowe's shares fell 2 percent.
Home Depot didn't update its full-year outlook ahead of its June 5 analyst meeting.
In other earnings news, Target shares shed 1.1 percent after the retail chain reported its profit slipped 7.5 percentas shoppers focused on staples such as food instead of the chain's chic clothes and home furnishings, crimping margins. Still, the results beat forecasts.
Staples' ticked higher after the office-supplies chain delivered earnings in-line with expectations. The company also launched a hostile bid for Dutch firm Corporate Express valued at1.5 billion euros ($2.3 billion).
Saks dropped 6.6 percent after the upscale retailer reported its earnings rose but missed expectations as promotions helped lure shoppers but rumpled margins.
Financial stocks fell 2.1 percent after Oppenheimer analyst Meredith Whitney warned that the credit crisis is far from over and could bleed into next year. She also lowered her 2008 outlook for JPMorgan, Citigroup and Bank of America . JPMorgan shares dropped 5 percent, while Citi shed 3.8 percent and Bank of America lost 2 percent.
Merck fell 0.7 percent after an earlier bump. New analysis showed that finasteride, a Merck drug now available in generic form, could be very effective in preventing prostate cancer. Merck still sells the drug, in a smaller dosage, as the baldness remedy Propecia.
Amgen rose slightly after the company released a late-stage report that showed its osteoporosis treatment was more effective than Merck's Fosamax.
Medtronic jumped 2.3 percent after medical-device maker reported its fiscal fourth-quarter earnings were flat but that the year-earlier period included a tax gain of about $129 million. Revenue rose 18 percent. The results beat expectations and the company's forecast was on target with forecasts.
Airlines skidded after a survey showed consumer satisfaction is at its lowest level since 2001, with delays, flight cancellations and steep rises in ticket prices cited as the main reasons for complaints.
American Airlines parent AMR and United Airlines both finished off more than 6 percent.
There was some select buying in technology stocks, including Google and Apple , but most of the sector was hammered by investors after Monday's warning from chip maker SanDisk that April sales, like the first quarter, would likely be soft as higher oil prices crimp consumer spending on technology. SanDisk shares fell again, losing nearly 11 percent of their value in the past two sessions. Intel skidded 3.2 percent.
On the Micro-hoo front, Microsoft's alternative proposal for Yahoo would be an alliance not a full-on merger, sources close to the talks said. The arrangement would involve Microsoft buying Yahoo's search business and taking a minority passive stake in the company after Yahoo sells its Asian assets.
Napster shot up 5.8 percent after the company opened the world's biggest MP3 download storewith more than 6 million songs in a direct challenge to Apple's iTunes store.
TUESDAY: Earnings from HP after the bell; Kentucky, Oregon primaries
WEDNESDAY: MBA mortgage applications; crude inventories; Fed's Warsh speaks; Fed minutes; Earnings from BJ's Wholesale
THURSDAY: Jobless claims; Fed's Kroszner speaks; Earnings from Gap; Libertarians choose presidential candidate
FRIDAY: Existing-home sales; Bond market closes early for Memorial Day holiday
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