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Global inflation fears continue to chill markets

The worries Thursday erupted early in New Zealand, where the inflation-wary central bank boosted interest rates to 8%. New Zealand’s action came on the heels of a rate increase by the European Central Bank on Wednesday.

US stocks plunged for the third consecutive day as fears of rising inflation worldwide swept into the markets. In the United States, traders pushed the rate on the benchmark US Treasury 10-year note to 5.13% Thursday on concern that signs of inflation are creeping into the economy. Investors are worried that the Federal Reserve’s next move might be a rate increase, not a cut that they had been counting on for weeks.

The major stock indicators fell Thursday by 1.5% or more. The Dow Jones industrial average dropped 198.94, or 1.5%, to finish at 13266.73. It was the worst single-day sell-off since March 13 for the Dow, which comprises 30 blue-chip stocks. Thursday, every component finished in the red. The cumulative loss for the Dow over the past three trading sessions is 409.59, or 3%. It is still up 6.4% for the year.

The broader Standard & Poor’s 500-stock index dropped 26.66, or 1.8%, to 1490.72. It is up 5.2% for the year. The tech-heavy Nasdaq composite index was down 45.8, or 1.8%, to 2541.38. It is up 4.9% for the year. Investors have adjusted their portfolios in the past week. Mutual fund and exchange-traded fund investors took an estimated $2.3 billion out of the US equity market during the week ended Wednesday, with most of the outflows taking place after stocks started to fall on Tuesday, according to TrimTabs Investment Research.

During the same period, investors poured an estimated $4.86 billion into the bond funds, contributing to a year-to-date total of $81.65 billion, more than the annual investment in bonds funds for any of the past four years. New economic data and comments by Federal Reserve officials have added to inflationary pressures and concentrated attention on interest rates. Government statistics released Thursday showed that applications for unemployment benefits declined last week, further evidence that the labor market remains strong.

The Labor Department said claims declined by 1,000, to 309,000. The figures followed a report the agency released Wednesday showing labor costs rose more than expected during the first quarter, while productivity rose more slowly. „Now you have full employment, less increases in productivity - that’s a combination for higher inflation down the road,” said Joseph Quinlan, chief market strategist for Bank of America. „There’s a whiff of inflation in the air driving interest rates higher.”

The higher rates have made bonds an increasingly attractive investment compared to equities, said analysts. Also weighing on stocks are rising oil prices heading into the summer driving season. Light, sweet crude jumped $1.01, to $66.97 a barrel on the New York Mercantile Exchange. Despite the heavy sell-off, some money managers said they did not think the four-year bull market was over. They said they expect volatility to increase as the stock market continues to be driven by economic data until the next earnings season starts in early July.

David Dreman of Dreman Value Management said he thinks an 8 to 10% correction in the coming months is probable, largely because the market had climbed so far so fast. But he noted that corporate balance sheets are strong and stock prices are at reasonable levels. „It’s not an end-of-the-world scenario,” said Dreman. (