Transcripts

Inflation Worries Rise With Labor Costs

SUSIE GHARIB: Stocks on Wall Street fell sharply for a second straight day, this time on concerns about inflation. The Dow tumbled 129 points and the NASDAQ lost 24. Driving today's sell-off: a new government report showing a bigger-than-expected rise in unit labor costs. That raised concerns that the Federal Reserve might raise interest rates down the road just the European Central Bank did today. Scott Gurvey reports.

SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: The Wall Street consensus had been that interest rates were likely to go down later in the year, due to a sluggish American economy. But economic forecasts have been pointing to a stronger second half.

Today the Labor Department reported unit labor costs rose 1.8 percent in the first quarter, more than expected. Traders know the Fed keeps a close watch on wages and will raise interest rates if it thinks costs are rising too fast. Bond traders are now indicating rates will either hold steady or actually increase in the second half.

Inflation fears are not limited to the United States. Today the European Central Bank raised its key interest rate one quarter of a point, to 4 percent. The move is seen as anti- inflationary, due to stronger than desired growth within the E.U.

Manny Weintraub of Integre Advisors says in today's world, American investors must pay attention to what goes on overseas.

MANNY WEINTRAUB, MANAGING DIRECTOR, INTEGRE ADVISORS: Today's move makes all markets around the world less attractive to all investors because it is all part of a pattern of decreasing liquidity, rising interest rates, and a stock is worth the discounted present value of its future cash flows. And as rates go higher, then the discount rate goes higher and the present value is less.

GURVEY: Morgan Stanley's European equity research team issued a sell signal on European equities, citing models which suggest a market correction. But Reiner Triltsch, European strategist at U.S. Trust, sees a European market pullback as a buying opportunity.

REINER TRILTSCH, EUROPEAN STRATEGIST, U.S. TRUST: We here at U.S. Trust like Europe a lot, especially its Eurozone, simply because the earrings growth rates are higher for the companies, the stock markets are more attractively valued than the U.S., and the economies are growing at a superb pace right now.

GURVEY: Adding to the market jitters, Federal Reserve officials have been speaking out about inflation concerns in recent days. The Fed's next policy setting meeting is a two-day affair beginning June 27th. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.