Stocks Get Lift From Yuan Talk

Markets were under pressure early Tuesday after the Labor Department said the producer price index for April rose 0.6%, higher than economists' expectations of a 0.4% rise. Core PPI, which excludes food and energy, rose 0.3%, also higher than expected.

"This is certainly worse than expected and again backs up what the Fed has been saying about inflationary bias in the economy," added Tower. "There is some pricing power now, with companies able to pass price increases along to consumers. That's what we'll hopefully see once the consumer price index number comes out tomorrow."

Also Tuesday, the Commerce Department said April housing starts jumped 11% to an annual rate of 2.04 million, slightly higher than expectations. Building permits for new housing rose 5.3% to 2.13 million, the biggest monthly increase since December 2002.

"The March number is in line with the trend in new-home sales and so, after the wild swings of recent months, starts should now be a bit calmer," says Ian Shepardson, chief economist with High Frequency Economics. "There is no reason to expect any change in the trend in the near term. Starts just lag the trend in new-home sales, which is solidly supported by strong mortgage applications."

The Fed also said that U.S. industrial production fell 0.2% in April, while capacity utilization dipped slightly to 79.2% for the month. Both declines in production and capacity utilization were unexpected.

"This is a soft report but it is not as bad as it looks," added Shepardson. "Production was pulled down by a 2.3% drop in utility output due to the relatively warm March. Manufacturing was disappointing, with output unchanged, but all the drop was in the auto sector, down 3.5%. No doubt industrial output is slowing but the trend is not as soft as these headlines suggest."