Wall Street mostly declined Tuesday as oil prices ratcheted higher and as speculation grew that the Federal Reserve might raise interest rates to fight inflation.
Financials advanced but other sectors retreated as investors found little to assuage recent concerns that the rise in energy prices would stymie consumer spending and overall economic growth. But investors are mindful that there are other potential risks to the economy if the Fed is forced to raise rates. Making it more expensive to borrow money could jeopardize a rebound in the economy.
Compounding investors' worries, the International Energy Agency said oil-producing nations outside OPEC are having a tough time keeping up with demand. The agency lowered its forecast for global oil demand because of the recent surge in prices, but said China might need more for reconstruction in the aftermath of May's earthquake.
This sent a barrel of light, sweet crude up $2.71 to $137.06 on the New York Mercantile Exchange. Crude prices last week climbed to a record $139.12.
Meanwhile, comments from Federal Reserve Chairman Ben Bernanke that a substantial economic downturn seems unlikely have raised expectations that the U.S. central bank might raise interest rates to fight inflation.
"I think people want to see the total impact," said Chris Colarik, a portfolio manager at Glenmede Investment Management in Philadelphia, referring to the effect of surging energy costs on the economy. "If you bet against the consumer over the past several years you would've been wrong. The consumer has held up surprisingly well. However, at some point there is a breaking point. I think some people believe we may be approaching that."
In late morning trading, the Dow Jones industrial average edged up 2.11, or 0.02 percent, to 12,282.43.
Broader stock indicators declined. The Standard & Poor's 500 index fell 5.75, or 0.41 percent, to 1,356.19, and the Nasdaq composite index fell 17.58, or 0.71 percent, to 2,441.88.
Declining issues outnumbered advancers by more than 2 to 1 on the New York Stock Exchange, where volume came to 440.9 million shares.
Bond prices fell. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 4.06 percent from 3.99 percent late Monday.
The dollar rose against other major currencies, while gold fell.
The rise in energy remains a concern for Bernanke, who on Monday reiterated during a speech that higher energy prices "suggest that growth risks remain to the downside." His assertion that the chance of a substantial downturn has decreased is raising Wall Street's expectations that the central bank might soon be comfortable in raising interest rates.
The central bank is worried that escalating commodities prices might curb consumers' appetite to buy discretionary items. This would pose a serious threat to the U.S. economy, as consumer spending accounts for more than two-thirds of economic activity.
In other economic news, the Commerce Department reported that the U.S. trade deficit had a larger-than-expected jump in April. Higher oil prices and an increase in consumption for crude offset a climb in exports, the government said.
The deficit in international trade of goods and services increased by 7.8 percent to $60.90 billion from March's revised $56.49 billion. The trade gap was forecast to rise to $59.5 billion, according to economists surveyed by Thomson/IFR.
In corporate news, Texas Instruments Inc. fell 82 cents, or 2.6 percent, to $30.51 after narrowing its second-quarter revenue and earnings expectations late Monday.
Billionaire Kirk Kerkorian's investment company said its tender offer for 20 million additional shares of Ford Motor Co. attracted a huge response and will easily enable it to increase its stake in the automaker to about 5.5 percent. The Dearborn, Michigan-based automaker said last month it no longer expected to return to profitability by 2009. Ford fell 21 cents, or 3.3 percent, to $6.15.
XTO Energy Inc. said it is acquiring privately held Hunt Petroleum Corp. for $4.19 billion in cash and stock. XTO said Hunt's assets, plus last month's acquisition of Headington Oil Co., prompted it to increase its 2008 production growth target to 28 to 30 percent. XTO rose 33 cents to $68.03.
The Russell 2000 index of smaller companies fell 4.12, or 0.56 percent, to 731.13.
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