Stocks Rally; Bond Yields Drop on Inflation Report
Treasury bond yields tumbled Tuesday on some muted inflation data and soothing words from Federal Reserve Chairman Alan Greenspan.
The stock market rallied, although the gains in most shares were modest. The Dow Jones industrial average rose 45.70 points, or 0.4%, to 10,380.43.
Bond yields, which zoomed to two-year highs Monday, pulled back after the government said “core” consumer inflation rose 0.2% in May, down from 0.3% in April and 0.4% in March.
Investors considered the core data, which exclude food and energy, more important than the overall inflation figure that showed a 0.6% jump last month.
Bond investors have feared that a sustained pickup in inflation could compel the Fed to raise short-term interest rates at a brisk pace in the second half. Several key inflation gauges have turned higher since last fall.
The May core figure, coupled with Greenspan’s testimony before Congress in which he sounded unworried about inflation, left more investors confident that the Fed would go slow with rate hikes.
The bond market “had moved to the point where it was pricing in a worst-case scenario,” said Ken Hackel, head of fixed-income strategy at RBS Greenwich Capital Markets. Tuesday’s news “has taken the wind out of the sails” of those expectations.
The yield on the 10-year Treasury note, which jumped to a two-year high of 4.87% on Monday from 4.80% late last week, dived to 4.68%. The two-year T-note yield fell to 2.75% from 2.93% on Monday.
On Wall Street, stocks increased for much of the session but sold off near the end.
The Nasdaq composite index gained 25.61 points, or 1.3%, to 1,995.60, after sliding 29.88 points on Monday. The Standard & Poor’s 500 index was up 6.72 points, or 0.6%, to 1,132.01.
Rising stocks outnumbered losers by more than 3 to 1 on the New York Stock Exchange and by about 2 to 1 on Nasdaq.
Analysts said prices pulled back in the afternoon on unconfirmed rumors of explosives found at New York’s John F. Kennedy International Airport and in midtown Manhattan. A terminal at JFK was evacuated after a suspicious package was found, but people were later allowed to reenter the terminal.
Among Tuesday’s highlights:
* Steel stocks soared after leading producer Nucor raised its second-quarter earnings forecast. Nucor jumped $2.69 to $69.54, U.S. Steel gained $1.44 to $30.34 and International Steel rose $1.11 to $28.90.
* Boeing added 42 cents to $49.25, a 52-week high, after the company won a $3.9-billion Pentagon contract for a submarine-hunting aircraft.
* Charles Schwab gained 8 cents to $9.13, even though the brokerage said it wouldn’t meet analysts’ second-quarter profit forecasts because investor trading had slowed in recent weeks.
