Wall Street reined in its fears about a collapse of the U.S. auto industry and cascading job losses Friday after the Treasury Department said it would step in to prevent a collapse of the Detroit Three automakers. Stocks came off of sharp early losses and traded in a more moderate range.
After falling 217 points at the open, the Dow Jones industrial average and other indicators began to pare their losses after White House and the Treasury said they are considering diverting money from the Wall Street rescue fund to stave off bankruptcy filings among the carmakers.
"The market just wants some clarity on the issue," said Matt King, chief investment officer of Bell Investment Advisors. "It's unknown if a bailout is going to get pushed through and if it does what it is going to look like. A degree of clarity will help the market's fears."
Stocks initially fell sharply Friday after a $14 billion rescue package for the automakers was derailed in the Senate late Thursday after the United Auto Workers refused to meet Republican demands for big wage cuts. Lawmakers have called on the Bush administration to use a portion of the $700 billion financial rescue to help the car companies.
General Motors and Chrysler have said they could run out of cash within weeks without government help. Ford Motor, which would also be eligible for aid under the bill, has said it has enough cash to make it through next year.
"A lot of the gloom about the course of these automakers is pretty much discounted," said Ken Mayland, president of research firm ClearView Economics. "So yes there was no agreement last night, but that's not coming as a huge shock."
The failure of the bill is feeding investors' concerns about job losses. More evidence of the battered labor market came late Thursday, as Bank of America said it expected to cut as many as 35,000 jobs over the next three years, including some from investment bank Merrill Lynch, which it agreed to buy in September.
The Dow tumbled 196 points Thursday as worries intensified that the auto bill would stall in the Senate.
Bond prices fell Friday. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 2.72% from 2.63% late Thursday. The yield on the three-month T-bill was unchanged at 0.02% from late Thursday. The bill has been in great demand because of the safety it offers investors.
The dollar was mixed against other major currencies, while gold prices fell.
Friday's economic reports underscored investors' growing fear of a severe and prolonged recession.
The Labor Department said wholesale prices sank in November for the fourth straight month, raising deflation fears. The Producer Price Index, which tracks costs of goods before they reach consumers, fell a greater-than-expected 2.2% last month as prices for gasoline and other energy prices retreated, the department said. That followed a record 2.8% drop in October.
Businesses also slashed inventories in October by the largest amount in five years. The Commerce Department said businesses reduced what was on shelves and back lots by 0.6% in October, triple the 0.2% decline economists expected. It was the biggest cut in inventories since August 2003.
The reductions came as business sales fell 3.5% in October. That topped the previous record drop of 2.4%, which occurred in September.
Job losses have become a huge concern in recent weeks, as companies across many parts of the economy have announced thousands of layoffs. AT&T, DuPont, Dow Chemical and Freeport-McMoRan Copper & Gold have said they will make reductions and analysts expect other companies will make reductions.
If one of the automakers declared bankruptcy, some estimate as many as 3 million U.S. jobs could be lost next year.
Light, sweet crude fell on the New York Mercantile Exchange.
Investors also grappled with further prospects of diminished confidence in Wall Street. Late Thursday, Bernard Madoff, a former Nasdaq stock market chairman was arrested on a securities fraud charge, accused of running a phony investment business that lost at least $50 billion and that he called a "giant Ponzi scheme," prosecutors said.
"It's not a happy day when you see a $50 billion fraud," said Mayland. "Things like that will just erode the public's confidence in the market."
Markets overseas tumbled in response to the failure of the auto bailout bill. Meanwhile, British Prime Minister Gordon Brown said European Union leaders have agreed on a $267 billion economic stimulus package to rescue their recession-hit economies. Japanese Prime Minister Taro Aso also announced a new stimulus package to shore up his country's economy. The new package includes $111 billion in tax breaks and public financing and $144 billion to prop up financial markets.
Japan's Nikkei stock average fell 5.56%. In afternoon trading, Britain's FTSE 100 fell 1.97%, Germany's DAX index slid 1.92%, and France's CAC-40 declined 2.72%.