Consumer Price Data Send Stocks Climbing
Stocks climbed to a three-month high Wednesday as the smallest increase in consumer prices since February and a drop in crude oil futures reassured investors that the Federal Reserve was taming inflation.
The inflation numbers sent bond yields sharply lower as investors bet that the Fed was finished with its two-year campaign of interest rate hikes. The yield on the benchmark 10-year Treasury note fell to 4.86% from 4.93% on Tuesday.
“The market has been waiting for data to confirm the Fed’s forecast that economic growth is slow enough to keep inflation under control,” said Jane Caron, chief economic strategist at Dwight Asset Management in Burlington, Vt.
The consumer price index, which measures price increases at the retail level, rose 0.4% in July, slightly higher than June’s 0.2% increase. But with food and fuel prices removed, the so-called core index rose just 0.2%, less than the 0.3% economists had expected.
Combined with Tuesday’s producer price index, which showed a decline in core wholesale prices, the data point to a drop in inflation pressures. That would allow the Fed to stop raising rates, which would otherwise threaten economic growth and cramp corporate profits.
“The Fed could not have written these numbers any better to make their case on the economy,” said Jack Ablin, chief investment officer at Harris Private Bank. “This, I think, could really help the markets start to move forward.”
The Dow Jones industrial average rose 96.86 points, or 0.9%, to 11,327.12, its best close since May 16. The Dow has gone up nearly 229 points in two days.
Broader stock indicators also advanced. The Standard & Poor’s 500 index climbed 9.85 points, or 0.8%, to 1,295.43, its highest level since May 11, and the Nasdaq composite index gained 34.53 points, or 1.6%, to 2,149.54 for its best close since July 6.
Advancing issues outnumbered decliners by more than 3 to 1 on the New York Stock Exchange in moderate trading.
Crude oil futures slipped for the second straight session as tensions in the Middle East continued to ease. A barrel of light crude settled at $71.89, down $1.16, in New York trading.
The housing market showed more signs of slowing, which could also motivate the Fed to maintain its current position on rates. Housing starts fell to an annualized rate of 1.8 million in July, down from 1.85 million in June. The number of building permits issued also fell.
The slowing economy and steady prices are good for stocks, but traders are watching closely to see whether the rally has staying power. Quincy Krosby, chief investment strategist for Hartford Financial Services Group, said the S&P; 500’s inability this summer to stay above the 1,280 level -- a key number for market strategists -- had indicated some hesitancy by investors.
“If we can see the market hold here and then build out, then that may be the beginning of a longer rally,” Krosby said. “It really depends on whether this slowing economy affects earnings or not, and we’ll have to wait and see for that.”
Overseas, Japan’s Nikkei stock average surged 1.6%. In Europe, Britain’s FTSE 100 closed down 0.02%, France’s CAC-40 rose 0.4% for the session and Germany’s DAX index gained 0.6%.
In other market highlights:
* A gauge of industrial companies advanced 2.1% for the top gain among 10 industry groups in the S&P; 500. Caterpillar, the biggest maker of earthmoving equipment, climbed $1.70 to $69.11. General Electric rose 51 cents to $33.71 after Banc of America Securities resumed coverage of the stock with a “buy” rating. The shares may rise later this year as GE expands profit margins, analyst Robert McCarthy said in a report.
* Qualcomm climbed $2.38 to $37.83. The company may increase earnings per share at a rate of 26% a year, Merrill Lynch analyst Tal Liani said. The company was added to Merrill’s so-called Focus 1 list.
* Prospects for stable interest rates may have helped home builders for a second day in spite of the decline in housing starts. KB Home rose $2.02 to $43.86, Toll Bros. climbed 96 cents to $25.49 and Pulte Homes advanced $1.42 to $29.75.
* Xilinx jumped $2.06, or 10%, to $22.71 for the biggest advance in the S&P; 500. The chip maker said in a Securities and Exchange Commission filing that an outside investigation found no evidence of fraud or manipulation in the company’s practices for granting stock options.
* Abercrombie & Fitch jumped $7.88 to $63.40. The clothing retailer forecast profit this year of as much as $4.54 a share, buoyed by sales at Hollister and abercrombie stores. Analysts expect earnings of $4.39 a share.
* R.R. Donnelley & Sons advanced 62 cents to $34.36. The printing company may get a takeover offer from two groups of buyout firms led by Madison Dearborn Partners and Blackstone Group, people familiar with the matter said.
