U.S. Stock Futures Drop as Inflation Rises Faster Than Forecast

U.S. stock-index futures fell after a gauge of inflation rose more than forecast in the first quarter, reinforcing speculation the Federal Reserve won't cut interest rates this year.

Bed Bath & Beyond, the largest U.S. home-furnishings retailer, dropped after it said earnings may decline because of the slump in housing. Novellus led shares of semiconductor equipment makers lower after saying second-quarter profit and sales will be at the bottom end of its forecast.

The Fed's preferred measure of inflation, which strips out food and energy costs, climbed at a 2.4 percent annual rate, faster than economists' forecast and the government's previous estimate. The economy grew at an annual rate of 0.7 percent in the first quarter, the slowest pace in four years. The reports may prompt the Fed to keep interest rates unchanged for months.

``The fact that the inflation measure is going up will not be good news for the Fed,'' said Edgar Peters, who helps manage $24 billion as chief investment officer at PanAgora Asset Management in Boston. ``It's very possible that we've seen the best returns in the stock market already this year.''

Standard & Poor's 500 Index futures expiring in September fell 1.9 to 1517 as of 9:19 a.m. in New York. Dow Jones Industrial Average futures lost 17 to 13,503. Nasdaq-100 Index futures declined 2 to 1953.5.

Bed Bath & Beyond, Novellus

Bed Bath & Beyond plunged $1.66 to $35.90. Profit for the year ending in February 2008 may be unchanged or decline if current housing conditions persist, Ronald Curwin, senior vice president of investor relations, said on a conference call.

Novellus retreated 88 cents to $29.02. The maker of equipment that helps turn silicon wafers into computer chips said second-quarter profit and sales will come in at the low end of its May forecast because of ``weakening semiconductor equipment industry demand.''

Economists surveyed by Bloomberg News had expected the Commerce Department's so-called core personal consumption price index to rise 2.2 percent, the same as the government's original estimate. Including food and energy costs, prices climbed 4.2 percent.

The Fed will announce its interest-rate decision at 2:15 p.m. today. Economists in a survey unanimously predict policy makers will keep the benchmark rate at 5.25 percent, where it has been for a year.

Stryker Corp. dropped 30 cents to $64.07. Goldman, Sachs & Co. cut its recommendation on shares of the world's third- largest maker of artificial knees and hips to ``neutral'' from ``buy'' and removed the stock from its ``Americas Buy List.''

Red Hat Inc. declined 42 cents to $23.77. The world's biggest seller of Linux operating system programs said cash flow from operations fell 4 percent to $52.3 million in the first quarter.

IPhone

Apple Inc. increased 12 cents to $122.01 before introducting its iPhone, a combination mobile phone and music player, in the U.S. tomorrow.

Continental Airlines rose $1 to $34.30. JPMorgan raised its recommendation on the shares to ``overweight'' from ``underweight'' on prospects for airline consolidation.

Shares of United Airlines parent UAL Corp. gained $1.20 to $40.15. JPMorgan also upgraded the stock to ``overweight'' from ``underweight.''

U.S. stocks posted the first gain in four days yesterday after an oil-price rally improved earnings prospects for fuel producers and profit at Oracle Corp. lifted shares of software makers.

source:bloomberg.com