NEW YORK -- U.S. stocks fell yesterday, ending a three-day rally, after a report showing producer prices rose in July sent bond yields soaring and stoked concern that the Federal Reserve will raise interest rates next week.
"People think we are going to see another rate increase when the Fed meets on Tuesday," said James Herrick, a senior trader at Robert W. Baird & Co., Milwaukee.
The slump in bond prices was exacerbated by a weaker-than-expected auction for $11 billion of 30 1/4 -year bonds, the final leg of the Treasury's quarterly debt sale.
The Dow Jones industrial average dropped 15.86, to 3,750.90, as shares of Caterpillar Inc., International Paper Co. and Chevron Corp. skidded. Computer-driven orders to sell stocks shaved about 20 points off the average at midday, according to Birinyi Associates.
Among broader market indexes, the Standard & Poor's 500 index fell 1.42, to 458.88, as oil companies and electric utilities fell.
The Nasdaq composite index fell 0.01, to 728.20, as gains in Intel Corp. and Microsoft Corp. were offset by declines in Worthington Industries and MCI Communications Corp.
Trading was active as 275 million shares changed hands on the New York Stock Exchange. About thirteen stocks fell for every seven that rose on the Big Board.
Stocks declined after the Labor Department said the producer price index rose 0.5 percent last month as gasoline prices shot higher. Many economists were expecting a 0.4 percent rise in the cost of materials used by manufacturers.
Today, the government will release the consumer price index for July. Investors are looking at the two inflation reports for signs of whether the central bank will vote to raise interest rates a fifth time this year when its Federal Open Market Committee meets.
Higher rates slow down economic growth and crimp corporate profits. They also make stocks less attractive relative to fixed-income investments.
"The big talk of the street at the moment is that the Fed will raise the discount rate 50 basis points," said Kenneth Ducey, director of trading at BT Brokerage.
The yield on the benchmark 30-year Treasury rose to 7.65 percent, up from 7.57 percent at yesterday's close, and the highest yield since July 13, as the Treasury completed its quarterly $40 billion sale of securities.
Even so, Nola Maddox Falcone, who manages $3.4 billion at Evergreen Asset Management, said a rise in rates has "been well publicized as a possibility," and she doesn't expect any increase to damage prospects for stocks.
Intel was the most active stock, followed by Microsoft, MCI Communications, Sybase Inc. and LDDS Communications.
Shares of Neutrogena Corp. rose $4.875, to $26.50, after the maker of specialty soaps and shampoos said it's in talks to be acquired by "a substantially larger company" that may result in ,, Neutrogena being acquired. PaineWebber analyst Andrew Shore said the stock is worth $25 to $32 a share on the basis of a possible takeover.
Shares of Household International Inc. rose $3, to $37, after the financial-services company named William Aldinger as president and chief executive. Mr. Aldinger was vice chairman of Wells Fargo Bank NA.
ECC International Corp., a maker of computer-controlled training simulators, saw its shares jump $1.625, to $14.375, after it said earnings for the fiscal fourth quarter rose to 24 cents a share from 4 cents a year ago.
Gap Inc. rose $4.375, to $41.25, after the clothing retailer's second-quarter earnings rose to 30 cents a share from 20 cents a year ago.
The American depositary receipts of L.M. Ericsson Telephone Co., the Swedish maker of telecommunications equipment, fell $3.125, to $50.625. Wednesday, Merrill Lynch & Co. lowered its investment opinion because of concern about slowing orders. Each ADR represents one common share.