The stock market had a tepid reaction last week to lower interest rates, lower oil prices and a stronger dollar. Major averages took off Monday as those trends reversed, further aided by some merger-inspired gains in tech shares. PeopleSoft's ( PSFT acceptance of Oracle's ( ORCL - Get Report) long-running buyout offer and a slightly better-than-expected retail sales report helped the market start off strong. Buying accelerated in the afternoon as two of the three major indexes bested last week's high-water marks. The Dow Jones Industrial Average, for example, crossed Friday's intraday high of 10,616 and rallied to close up 0.9% to 10,638.32. The S&P 500 exceeded last week's high of 1192 to finish at 1198.68, a gain of 0.9%. The Nasdaq Composite didn't beat last week's high above 2160 but gained 1% to 2148.50. Honeywell ( HON - Get Report) was the top gainer among Dow components, rising 3.2% thanks to an improving outlook. PeopleSoft gained 10% and Oracle rose nearly as much while other software makers gained in concert, including SAP ( SAP - Get Report), up 3%, and Lawson ( LWSN, which added 4%.
As evidence that the Fed might become more vigilant on inflation, analysts point to the central bank's monthly business climate survey. The Beige Book for October reported businesses were expressing increasing concerns about rising costs of energy and materials while retail prices increases were subdued. The December survey found further evidence as increased cost pressures were reported across the country and "some industries were successful in passing along cost increases." Meanwhile, the October Consumer Price Index gained 0.6%, the most in five months, and Friday's Producer Price Index report showed a 0.5% rise, ahead of forecasts, mostly due to higher energy prices. Prices of finished goods rose 5% over the prior 12 months, prices of intermediate materials rose almost 10% and crude materials jumped 26%. Friday, after the Fed meeting, the November CPI arrives.
The dollar's fall, which resumed Monday after a three-day minirally, is also a potential spark of inflation as it makes imports more costly and reduces cost competition on domestically produced goods. Moreover, the FOMC's Nov. 10 statement said inflation and longer-term inflation expectations remained "well contained" a step up in concern from the September statement's assessment that "inflation and inflation expectations have eased in recent months." Still, the odds favor no significant change to the Fed's inflation assessment, according to senior economist Haseeb Ahmed of Economy.com. After all, oil prices have plummeted in recent weeks, although crude futures rose 0.4% to $41.19 per barrel Monday. Furthermore, a change in wording implying more rate hikes isn't consistent with recent speeches by Fed officials sticking to the "measured pace" rhetoric, he said. A shift is "very unlikely," he concluded Monday in a commentary on the Fed meeting. So, the likely path remains the same -- slowly higher rates. Along with a variety of data showing continued economic strength and improving consumer confidence, the inflation data will keep the Fed on its path of measured tightening for some time to come, November's weak payrolls report notwithstanding.