Stocks slipped Wednesday after a senior Fed member said policy makers should start raising rates to 1 percent soon.
Stocks had been lower for much of the day, pared some of their losses after the 10-year Treasury auction was met with strong demand, then fell sharply after the Fed member's remarks.
Telecom and energy stocks were among the weakest performers, while technology and health care were among the best.
The Dow, which had been within shooting distance of 11,000 earlier this week, ended below 10,900. Verizon , American Express and Alcoa were among the biggest decliners.
Bank of America , Cisco and Pfizer were among the top Dow gainers.
The CBOE volatility index, widely considered to be the best gauge of fear in the market,jumped to 16.62.
Kansas City Fed President Thomas Hoenig, who has been the lone dissenter in policy meetings, delivered some strong words in a speech today, saying the Fed should start raising rates to 1 percent soon, lest it cultivate a bubble.
"The time is right to put the market on noticethat it must again manage its risk, be accountable for its actions, and cease its reliance on assurances that the Federal Reserve, not they, will manage the risks they must deal with in a market economy," Hoenig said.
Hoenig added that even 1 percent is still accommodative.
This came after Fed Chairman Ben Bernanke said earlier that the Fed is in no rush to raise interest rates and NY Fed President William Dudley reiterated his support of keeping the "extended period" language.
"Hoenig's comments are further evidence that the bullish sentiment we saw in March and the first week of April is rather fragile right now. His comments may have been viewed as tough, but we need tough," said Todd Schoenberger, managing director of LandColt Trading. "The fact that stocks sold off is a clue that the bears may be returning to Wall Street sooner than we originally thought."
Some traders said Hoenig's remarks, which were to be expected given his dissent in recent Fed meetings, were simply an excuse for traders to sell an overbought market.
The markets seem to be a bit ahead of itself and we may have already seen "half the gain" we'll see all year, said Steve Neimeth, portfolio manager at SunAmerica Asset Management.
Banks got a boost as Goldman raised its outlook on several regional banks, including KeyCorp , which it upgraded to "buy" from "neutral."
Rochdale Securities analyst Dick Bove said he likes long buys in Citigroup , Goldman Sachs and Bank of New York . But he said bank earnings will disappointthis quarter and he's more inclined to make short-term plays in the sector — and play them in pairs.
Techs showed pockets of strength, with Micron Technology up more than 3 percent.
Palm surged 20 percent amid speculation that the smartphone maker may be a takeover target.
Treasury prices pushed higher after the latest 10-year auction. The $21 billion sale fetched a high yield of 3.90 percent and the bid-to-cover ratio was 3.72.
Based on the demand from today's Treasury auction, expect strong results from tomorrow's 30-year auction, said Neimeth.
Oil fell toward $86 a barrelafter a report showed crude inventories rose by 2 million barrels last week. Gold priceshit a three-month peak near $1,150 an ounce and the dollar rose against the euro amid nagging worries about Greece's debt situation
Homebuilders skidded after a report this morning showed mortgage applications ticked up just 0.2 percentlast week as a spike in mortgage rates clipped demand for refinancing.
Some good news on the jobs front: Twenty-nine percent of CEOs in the U.S. said they are ready to add domestic jobs over the next six months, according to a Business Roundtable survey. This is the first time since early 2008 that more leaders anticipate adding jobs than cutting them.
Of course, it's not a straight line up: Just a day earlier, CA announced it would cut 1,000 jobs. The business software maker’s shares fell another 3 percent today.
Retail stocks were mixed ahead of same-store sales from major chains, due out tomorrow. JCPenney, Nordstrom and Sears fell, while Talbots, Big Lots and Lowe's were higher.
A report today showed consumer borrowing fell by $11.5 billionin February, much weaker than the $500 million gain expected.
A few earnings reports to note:
Family Dollar shares jumped over 3 percent after the dollar-store chain beat earnings expectations and said it expects same-store sales to be up 6 to 8 percent in the current quarter.
Monsanto fell after the agricultural-products maker missed its earnings target, citing competitive pressures.
After the bell today, results are due out from home-goods retailer Bed Bath & Beyond .
Alcoa is scheduled to report earnings next Monday, marking the unofficial start to earnings season.
Expect a strong earnings season in the upcoming quarter, said Neimeth. He expects to see a recovery "for two more quarters." However, the wild card will be in the fourth quarter, he warned. Earnings gains and GDP growth will slow down by then and investors may have a "more tempered economic outlook."
On the M&A front, Renault, Nissan and Daimler officially announced their deal to swap stakes and jointly develop small cars and engines.
CKE Restaurants shares jumped on word that it has received another offer from an undisclosed bidder, possibly leading to a potential bidding war for the fast food giant. CKE previously agreed to a $619 million deal with private equity firm Thomas H. Lee Partners in February.
And Australia's Macarthur Coalrejected a $3.27 billion takeover bid from U.S. coal miner Peabody Energy , with analysts saying Peabody will likely have to raise that bid by about 10% to be successful.
Volume was average, with about 9.63 billion shares changing hands on the three major exchanges. Decliners outpaced advancers, roughly 2 to 1.
Still to Come:
WEDNESDAY: Earnings from Bed, Bath & Beyond after the bell
THURSDAY: BOE, ECB announcements; weekly jobless claims; Fed's Kocherlakota speaks; 30-year auction; Earnings from Pier 1, Chevron (interim results)
FRIDAY: Wholesale trade
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