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A stronger-than-expected consumer inflation report re-ignited fears of inflation and raised the odds of further interest-rate rises. This lead the stocks to end sharply down with the Dow Jones Industrial Average logging its biggest one-day point drop in more than three years. The Nasdaq Composite Index fell for the seventh session in a row to wipe out its gains for the year, while the S&P 500 Index ended at a more than three-month low.

Today, the Dow Jones Industrial average closed down 214.28 or 1.8% to 11,205.61, the broader Standard & Poor’s 500 index closed down 21.76 or 1.7% to 1,270.32, and the Nasdaq composite index closed down 33.33 or 1.5% to 2,195.80. Since the Federal Reserve last raised interest rates on May 10, the Dow has pulled back 3.8% and the Nasdaq has fallen 5.4%, while the S&P has shed 3.9%.

Market breadth was negative. On the New York Stock Exchange, decliners topped advancers by five to one on volume of 2.1 billion shares. On the Nasdaq, losers edged out winners by a margin of three to one as 2.4 billion shares changed hands.

The latest consumer-price report indicates clearly that “not only is the economy accelerating, but inflation is picking up.” The consumer-price index rose 0.6%. Excluding food and energy prices, consumer prices rose 0.3%. The increase in the CPI and the core rate were both slightly higher than the expected 0.5% and 0.2% respectively. After the inflation data, the federal funds-futures market priced in a more than 50% chance of a rate increase in June.

Amidst the mayhem, shares of Hewlett-Packard Co. closed up $1.05 or 3.4% at $32.16. The company reported a 51% rise in its second-quarter profit as the technology giant saw strong sales at its personal-computer and printing and imaging divisions. The company’s earnings also beat Wall Street expectations.

Stock of Applied Materials Inc. fell $0.92 or 5.2% to $16.93, after the chip equipment maker posted a higher quarterly profit that topped Wall Street estimates. Some analysts, however, expressed concerns about decelerating bookings and a conservative outlook. Net profit rose 35% in its second quarter, helped by stronger demand for its equipment used to manufacture chips that power consumer electronic devices.

Circuit City Stores Inc. shares rose $0.52 or 1.8% to $29.45 after the consumer-electronics retailer reiterated its outlook for net sales growth of 7% to 11% in fiscal 2007, and said that it sees a break-even performance for the first quarter. Investor confidence is based on higher sales for flat-panel TVs and portable-music players and a promise of improving margins.

Other noteworthy news included Verizon Communications closed down $0.89 to $30.81, after it denied media reports that it entered into a contract with the National Security Agency, providing the government office with info about its customer phone calls.

Crude-oil futures ended at their lowest level in more than a month after weekly data showed a rise in gasoline supplies for a third week in a row. Oil for June delivery fell 84 cents to $68.69 a barrel on the New York Mercantile Exchange.

All the best,
Manuel Jesus-Backus
The Portfolio Crafter