Stocks Get Lift From Yuan Talk

Solid retail earnings also help the major averages.
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Updated from 4:07 p.m. EDT

Stocks closed higher Tuesday, reversing earlier losses after the Treasury Department released a report that stopped short of accusing China of currency manipulation.

The

Dow Jones Industrial Average

rose 79.59 points, or 0.78%, to 10,331.88, after trading as low as 10,213.14 earlier in the session. The

S&P 500

added 8.11 points, or 0.7%, to 1173.80. The

Nasdaq Composite

rose 9.72 points, or 0.49%, to 2004.15.

The Treasury Department said in a report to Congress that China's currency policies are causing market distortions and endangering economic growth, but declined to classify the country as an offender under a federal currency manipulation statute.

While the statement is likely to anger U.S. businesses that believe China gets an export edge by keeping the yuan artificially low, it pleased stock investors who fear the uncertainty of government sanctions.

"The market took the attitude that we can somehow avoid a trade war with China," said Peter Boockvar, equity strategist with Miller Tabak. "It's just semantics, as Treasury Secretary John Snow is still talking about problems without coming out and saying China is manipulating. Just because they didn't use the term 'manipulative,' people think they need to buy stocks. Nothing changes, but hopefully it'll calm down Congress."

Trading volume on the

New York Stock Exchange

was 1.89 billion shares, with advancers beating decliners by a 5-to-4 margin. Volume on the Nasdaq was 1.52 billion shares, with advancers outpacing decliners 8 to 7.

In other markets, the 10-year Treasury was up 2/32 in price to yield 4.12%, while the dollar rose against the yen and euro.

"The bond market is amazing," said Ken Tower, chief market strategist with CyberTrader. "Despite today's worse-than-expected inflation news, the long end of the curve has reacted little. Yesterday, yields were near three-month lows. The bond market's lack of panic is bullish for stocks."

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."

Stocks staged a rally Monday that many pundits had trouble explaining. Blue chips added about 1% despite weak data on New York-area economic activity and a report that showed foreigners' taste for U.S. assets waned in March.

One early rationale for yesterday's run-up was falling oil, but that catalyst ebbed as the session progressed; June crude ended Monday down just 6 cents at $48.61. The contract rose 36 cents to close at $48.97 a barrel Tuesday.

Falling oil hurt major oil stocks Monday. On Tuesday, A.G. Edwards upgraded

Exxon Mobil

(XOM) - Get Report

to buy from hold, saying recent weakness has created a buying opportunity. The brokerage set a $60 price target on the stock, which was recently up 51 cents, or 1%, to $53.86. Meanwhile,

Forest Oil

(FST)

rose 4.1% after Banc of America Securities upgraded its shares, adding $1.44 to $36.64.

Some of Tuesday's early trepidation may have been the result of concerns about quarterly earnings from

Hewlett-Packard

(HPQ) - Get Report

. After the bell, the hardware giant reported second-quarter net income of $966 million, or 33 cents a share, up from $884 million, or 29 cents a share, a year ago. Revenue climbed 7% to $21.57 billion. Excluding one-time costs, H-P earned 37 cents a share. H-P was expected to report an operating profit of 36 cents a share on sales of $21.3 billion. Shares of H-P closed up 54 cents, or 2.6%, to $21.55.

Among corporate news Tuesday,

Home Depot

(HD) - Get Report

said first-quarter earnings rose 16% from a year ago to $1.2 billion, or 57 cents a share, beating estimates. At $19 billion, sales were about $300 million below Wall Street forecasts. Shares rose $1.49, or 4%, to $38.86.

Two other big retailers reported penny-beats in first-quarter earnings Tuesday:

BJ's Wholesale

(BJ) - Get Report

and

Staples

(SPLS)

. Staples also affirmed guidance for the full year. BJ's Wholesale added $1.29, or 4.5%, to $29.59, and Staples was up by $1.02, or 5%, to finish at $21.56.

J.C. Penney

(JCP) - Get Report

said that first-quarter profit rose fourfold to $172 million, or 63 cents a share, beating analysts' estimates by 2 cents a share. Shares gained $1.52, or 3.2%, to $49.35.

Department-store operator

Saks

(SKS)

posted first-quarter net income of $17.1 million, or 12 cents a share. Saks did not provide year-ago results because it is in the process of restating them. The Thomson First Call consensus was for earnings of 16 cents a share. Shares fell 34 cents, or 2%, to $16.60.

Retailer

Target

(TGT) - Get Report

said late Monday that May same-store sales are currently in line with previous forecasts of a 3% to 5% increase. Target expects to report May same-store sales on June 2. Shares were up 84 cents, or 1.7%, to close at $50.34.

Deere

(DE) - Get Report

rose 4.2% after the company said it earned $604 million, or $2.43 a share, in its fiscal second quarter, up from $477.3 million, or $1.88, a year ago. Revenue rose 13% to $6.62 billion. Shares gained $2.50 to $62.29.

Agilent

(A) - Get Report

said second-quarter earnings slid 11% from a year ago to $95 million, or 19 cents a share. Adjusted earnings of 20 cents a share were a penny short of estimates. The company also lowered third-quarter guidance. Agilent was recently higher by 92 cents, or 4.3%, to finish at $22.48.

Onyx

(ONXX)

, which along with partner

Bayer

(BAY)

published a trial highlighting sorafenib in renal cell carcinoma on Monday, faced both an upgrade and a downgrade on Tuesday. Bear Stearns upgraded the stock to outperform from peer perform and set a stock price target of $40, while Leerink Swan downgraded Onyx to market perform from outperform. The stock, which lost more than 14% on Monday, fell 24 cents, or 0.9%, to $27.05.

Overseas markets were mixed, with London's FTSE 100 recently up 0.3% to 4898 and Germany's Xetra DAX falling 0.2% to 4251. In Asia, Japan's Nikkei fell 1.1% overnight to 10,825, while Hong Kong's Hang Seng fell 1.4% to 13,667.

Investors will see another key economic report Wednesday with the consumer price index for April, which is expected to increase 0.4% with core CPI rising 0.2%.

To view Aaron Task's video take on today's market, click here

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