"Aaaaahhhhhh."

The sound of stock market participants breathing a huge sigh of relief could be heard loud and clear Wednesday as the bond market selloff finally halted -- at least for one day.

"It was a very good day," Marc Pado, chief market analyst at Cantor Fitzgerald, says about the stock market's strongest single-day rally thus far this year.

As the yield on the 10-year Treasury note fell to 5.21% vs. an intraday high of 5.33%, the

Dow Jones Industrial Average

gained 187 points, or 1.4%, to close at 13,482.25.

The Dow enjoyed its best point gain since July 2006, thanks to more than 2% gains in eight of its 30 components, including

Intel

(INTC) - Get Report

,

Caterpillar

(CAT) - Get Report

,

Citigroup

(C) - Get Report

and

General Motors

(GM) - Get Report

. Every stock in the index rose Wednesday, save

Verizon

(VZ) - Get Report

.

The

S&P 500

added 1.5% to 1515.67, and the

Nasdaq Composite

finished the day up 1.3% to close at 2582.31.

With 87% of the 2.5 billion shares traded on the

New York Stock Exchange

to the upside, the move was truly broad-based. The Dow Jones Utility index jumped 2%, and the recently beleaguered Dow Jones Transportation Average also gained 1.7%. The typical laggard, the technology sector, also gained solid ground, with the Philadelphia Semiconductor Sector Index adding 1.4% on the day.

"But it was just one day," Pado was quick to add, noting that Thursday and Friday's inflation data could reignite bond market jitters. His caveat epitomizes the market's new state of mind: With a normalized yield curve, no expectations for rate cuts and interest rates in a new, plus-5% range, inflation is back as the market's straw man.

Analysts believe the producer price index will come in 0.6% higher in May, with core producer prices up 0.2%. Friday's more critical consumer price index is expected to rise 0.6% as well, but core prices are expected to nudge up just 0.2% in the month to leave year-over-year core inflation running at 2.3%.

Those who believed the stock market would resume its uptrend as soon as Treasury bonds stabilized were surely vindicated Wednesday.

But much of that prognostication was based on the notion that the bond market selloff came from bond bulls finally turning around and accepting stronger economic growth, as opposed to forecasting higher inflation. It was odd, then, but likely pure coincidence, that the bond market stopped melting down on a day filled with unanimously strong economic data.

"There is no one neat story to sum it all up," says T.J. Marta, fixed-income strategist at RBC Capital Markets.

The bond market rallied Wednesday because the market became technically oversold, and huge bids came into the market from Asian buyers as well as from pension funds that felt 5.3% on the 10-year was cheap enough, says Marta.

The big bond bidders came in just after the Census Bureau reported that retail sales jumped 1.4% in May, well above the 0.6% consensus estimate. Excluding autos, sales increased 1.3%, compared with expectations for a 0.7% gain. Business inventories also gained 0.4% in April, slightly higher than the 0.3% gain expected by analysts.

The data nudged Wall Street estimates of second-quarter GDP to above-trend levels. Economists at JPMorgan, Lehman Brothers and Bear Stearns all put 4% as a possibility for the second quarter.

If stock market traders were worried about all this strong growth spurring inflation, the Federal Reserve's inter-meeting report on economic conditions in the U.S., known as the beige book, came out at 2 p.m. EDT and put them at ease, says Douglas Roberts, managing principal at Channel Capital Research.

The beige book noted that hiring activity picked up, but "most Districts reported that overall wage pressures do not seem to have increased." Broadly, the beige book stated that economic activity continued to expand and that manufacturing activity was stronger.

So, while the market celebrates messages of contained inflation and strong growth, the markets are swimming in a new soup, in which the risks to growth have tempered and the risks to inflation have perhaps increased. Merrill Lynch's monthly fund manager survey showed that 47% of respondents expect core inflation to be higher one year from now, up from only 11% three months ago.

In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click

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