Stocks finished lower Tuesday, though off their their weakest levels, as the Dow stumbled in its bid to crack the 12,000 mark. An unexpected increase in a closely watched inflation gauge and a surprisingly steep drop in industrial production offset some solid corporate earnings. Traders were looking ahead to Wednesday's consumer inflation numbers, expected to be mild, says Standard & Poor's Equity Research.
The Dow Jones industrial average slipped 30.58 points, or 0.26%, to 11,950.02, pulling back from Monday's all-time closing high of 11,980.6 and new intraday record of 11,997.09. The broader Standard & Poor's 500 index fell 5 points, or 0.37%, to 1,364.05. The tech-heavy Nasdaq composite dropped 18.89 points, or 0.8%, to 2,344.95, hampered by weakness in semiconductor stocks.
NYSE breadth was negative, with 21 issues declining for every 13 advancing. Nasdaq breadth was 18-11 negative.
A report on wholesale inflation weighed on stocks Tuesday. The producer price index (PPI) fell 1.3% in September on a 22.2% drop in gas prices, but the core PPI, which excludes food and energy, climbed a surprising 0.6%. "The markets will focus on the jump in the core number," says Action Economics.
Some analysts say rising inflation might mean the Federal Reserve isn't done raising rates. "I still think that upside inflation risks dominate, and the Fed may still have work to do," says Richard Berner, Morgan Stanley's chief U.S. economist. "Among the reasons: inflation expectations are elevated and edging higher, slack in the economy has dwindled, and costs are accelerating."
Still, the PPI report doesn't change expectations for Wednesday's consumer price index (CPI) data, other analysts say. "The heavy discounting of vehicle prices over the past two months did not seem to have a significant effect in the core CPI, and therefore this month's rebound also seems unlikely to push the relevant CPI components significantly higher," says Goldman Sachs.
In other economic data, industrial production fell 0.6% in September, a much larger drop than expected, after an upwardly revised flat reading in August. Capacity utilization fell to 81.9% from 82.5%
Meanwhile, the National Association of Home Builders' housing-market index bounced to 31 in October, snapping a 12-month decline from 68 a year earlier and a downwardly revised 30 in September. Wednesday's calendar holds the release of September housing starts.
On the company side, Johnson & Johnson (JNJ) was higher after the health products maker posted a 9% rise in third-quarter profit, beating analyst expectations.
Fellow Dow member United Technologies (UTX) was lower despite a 21% jump in third-quarter profit, which topped Street estimates. The company also warned that a slowing housing market could dampen its 2007 earnings.
Shares of Merrill Lynch (MER) rose after the brokerage said its third-quarter earnings more than doubled.
Dow components Intel (INTC) and IBM (IBM) were set to report earnings after the close, along with Internet bellwether Yahoo! (YHOO) and phone maker Motorola (MOT).
In analyst calls, Intel was lower as Goldman Sachs downgraded the chipmaker from buy to neutral on valuation. Separately, Cowen downgraded Yahoo! from outperform to neutral, but shares of the company rebounded in the final hour.
Companies set to post quarterly results Wednseday include Apple (AAPL), eBay (EBAY) and J.P. Morgan (JPM).
M&A activity also remained in focus Tuesday. Chicago Mercantile Exchange Holdings (CME) reportedly agreed to acquire CBOT Holdings (BOT) in a roughly $8 billion share swap that would a giant global derivatives exchange.
Elsewhere, Wal-Mart (WMT) edged lower amid reports the company has agreed to buy a shopping chain in China for about $1 billion.
In the energy markets, November West Texas Intermediate crude futures fell $1.01 to $58.93 a barrel of ahead of Wednesday's weekly inventory report.
European markets finished lower, breaking a nine-day rally. In London, the FTSE-100 index fell 65.6 points, or 1.06%, to 6,106.8. Germany's DAX index dropped 71.44 points, or 1.15%, to 6,115.1. In Paris, the CAC 40 index was down 58.99 points, or 1.1%, to 5,302.99.
Asian markets ended mixed amid North Korea nuclear worries. In Japan, the Nikkei 225 index shed 81.17 points, or 0.49%, to 16,611.59. In Hong Kong, the Hang Seng index nudged higher 4.64 points, or 0.03%, to 18,014.84. Korea's Kospi index lost 5.42 points, or 0.4%, to 1,351.3.
Treasury yields slipped following the soft industrial production data, recovering from early lows on the solid NAHB report. Bond traders expect milder inflation data tomorrow, says Action Economics. The 10-year note edged up in price to 100-24/32 for a yield of 4.77%, while the 30-year bond nudged higher to 93-23/32 for a yield of 4.9%.