Futures drop after Bernanke's inflation warning : US Business

By Ellis Mnyandu

NEW YORK (Reuters) - U.S. stock index futures fell on Tuesday after Federal Reserve Chairman Ben Bernanke said the central bank would strongly resist rising inflation, reviving fears that interest rates may be on their way up.

Bernanke's comments rattled markets across the globe, with Asia falling overnight and European equities down for a fifth straight day on Tuesday.

The prospect of higher borrowing costs for businesses and consumers as the economy grapples with damage from the housing slump puts pressure on U.S. stocks across the board.

Also likely to weigh on sentiment was a warning from AT&T Inc that the telecommunications company will suffer lower profit this year and next year as it subsidizes the price of Apple Inc's newest iPhone. AT&T, the largest U.S. mobile phone company, is the exclusive network carrier for the iPhone.

"What we have here is a market that is very nervous," said Peter Cardillo, chief market economist at Avalon Partners in New York.

"You have slower economic activity and you have inflation. I think we are in the midst of a small dose of stagflation, where the economy is limping along with higher inflation."

S&P 500 futures were down 9.4 points, below fair value, a mathematical formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract.

Dow Jones industrial average futures fell 85 points, while Nasdaq 100 futures slid 18 points.

Shares of banks, retailers and big manufacturers were likely to feel the hardest impact from worry about higher borrowing costs. Technology shares were also expected to suffer.

Oil's price topped $136 a barrel, bad news for sectors sensitive to fuel prices, like airlines.

Bernanke's remarks late on Monday suggested inflation is featuring more prominently on the Fed's radar screen, indicating policy-makers have little intention to cut interest rates further, with oil prices hitting record highs and a surge in other commodities.

Bernanke's comments came after U.S. crude oil prices hit a record above $139 a barrel on Friday, a day on which government reported the unemployment rate notched its biggest jump in 22 years in May.

U.S. crude for July delivery rose $1.79 to $136.10 in electronic trading.

U.S. stocks ended mixed on Monday as upbeat monthly sales from McDonald's Corp and a surprise gain in pending home sales offset sharp losses in the financial and technology stocks.

(Editing by Kenneth Barry)

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