Tame Inflation Spurs Bulls

Stocks rally as traders bet the latest economic data will keep the Fed from raising rates again.
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Updated from 4:04 p.m. EDT

Stocks closed sharply higher again Wednesday as another encouraging reading on inflation helped ease concerns about future

Federal Reserve

rate hikes.

The

Dow Jones Industrial Average

rose 96.86 points, or 0.86%, to 11,327.12, its highest close since May. The

S&P 500

was up 9.85 points, or 0.77%, to 1295.43, and the

Nasdaq Composite

added 34.53 points, or 1.63%, to 2149.54.

The Dow benefited from gains of 2.6% or more in

Boeing

(BA) - Get Report

,

Caterpillar

(CAT) - Get Report

,

IBM

(IBM) - Get Report

and

Intel

(INTC) - Get Report

.

The tech-heavy Nasdaq was supported by a 4.3% surge in the Philadelphia Semiconductor Sector Index. Components

Marvell Technologies

(MRVL) - Get Report

and

Xilinx

(XLNX) - Get Report

closed up 11% and 10%, respectively. The Nasdaq has tacked on 92 points so far this week, for its best three-day run in roughly two years.

About 1.40 billion shares changed hands on the

New York Stock Exchange

, with advancers beating decliners by a 3-to-1 margin. Volume on the Nasdaq was 1.50 billion shares, and twice as many stocks rose as the number that fell.

"The market has certainly felt that the Fed's script is playing out the last two sessions," said Jay Suskind, head of equity trading with Ryan Beck. "We have a bit of clarity, but we do have another month of inflationary data ahead of us until the next meeting."

Giving a boost to the market was a Labor Department report showing that the consumer price index rose 0.4% last month, but only 0.2% excluding food and energy prices. Both numbers matched expectations. Still, core prices have now increased 2.7% in the past year, the highest rate since 2001.

The report comes a day after a much lower-than-expected reading on the core producer price index. The soft PPI powered stocks Tuesday, giving investors hope the Fed will keep interest rates where they are. The Dow rose 132 points to 11,230, the S&P 500 gained 17 points to 1285, and the Nasdaq jumped 46 points to 2115.

Marc Pado, U.S. market strategist with Cantor Fitzgerald, said "the CPI is unquestionably more important to the Fed," but he cautioned that "the market shouldn't get too excited over one piece of data."

Pado said the PPI helped justify the Fed's decision to pause, but it is a backward-looking number. "The averages had a great day yesterday and most moved above technical resistance levels," he said. "We'll see if those levels can hold through the end of this week or if this was just a short-term violation."

To view Gregg Greenberg's video take on today's market, click here

.

Following the CPI report, the 10-year Treasury rose 15/32 in price, dropping the yield to 4.87% from 4.92% before the report. The dollar fell against the yen and euro, and gold was higher by $6.10 to close at $639 an ounce.

Also on the economic docket, the Commerce Department said housing starts fell 2.5% to 1.795 million annualized units in July, coming in short of expectations. The Federal Reserve said industrial production increased 0.4% in July, while capacity utilization climbed to 82.4% from 82.3% in June.

After the release of all the day's economic data, financial futures are pricing in a 10% chance of a 25-basis point hike at the Sept. 20 meeting, down from 20% on Tuesday. Currently, the fed funds target rate is 5.25%.

Oil extended its decline into a third day. The Energy Department's weekly inventory report showed a decline of 1.6 million barrels in crude stocks last week, but the data failed to lift oil futures. Gasoline inventories dropped 2.3 million barrels, and distillate supplies rose by 800,000 barrels.

Crude dropped another $1.16 to close at $71.89 a barrel in Nymex floor trading. Since Friday's close, crude prices have fallen 3.3% as the ceasefire between Israeli forces and Hezbollah has remained intact.

Late Tuesday,

Applied Materials

(AMAT) - Get Report

posted a fiscal third-quarter profit of $512 million, or 33 cents a share, up 39% from last year. Sales surged 56% to $2.54 billion. Results beat the Thomson First Call average estimate for earnings of 30 cents a share on revenue of $2.4 billion. The stock reversed early weakness and tacked on 2 cents, or 0.1%, to $15.71.

After Tuesday's close, apparel retailer

Abercrombie & Fitch

(ANF) - Get Report

reported second-quarter earnings of $65.7 million, or 72 cents a share, up from $57.4 million, or a 63 cents a share, a year ago. Quarterly revenue jumped to $658.7 million from $571.6 million. The consensus was for a profit of 71 cents on revenue of $658 million. Shares surged, finishing up $7.88, or 14.2%, to $63.40.

On the research front, HSBC Securities upgraded

Expeditors International of Washington

(EXPD) - Get Report

to neutral from underweight. Shares of the air delivery and freight services company were higher by $1.61, or 4%, to close at $42.16.

Overseas markets were mixed, with London's FTSE 100 losing 0.1% to 5895 and Germany's Xetra DAX higher by 0.6% to 5813. In Asia, Japan's Nikkei rose 1.6% overnight to 16,071, and Hong Kong's Hang Seng gained 1% to 17,451.

On Thursday, earnings reports are expected from

Dell

(DELL) - Get Report

,

Sears Holdings

(SHLD)

,

Gap

(GPS) - Get Report

and

Limited

(LTD)

.

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