Feb. 14 (Bloomberg) -- Federal Reserve Chairman Ben Bernanke enabled the stock market to continue its steepest advance since September with congressional testimony that brightened the outlook for inflation. Banks and industrial companies were the biggest gainers on the New York Stock Exchange.

Citigroup Inc. and JPMorgan Chase & Co., two of the three largest U.S. banks, led the rally, helping send the Dow Jones Industrial Average to its highest close and the Standard & Poor's 500 Index to a six-year high. The Nasdaq Composite Index rose the most in a month after Applied Materials Inc., the biggest maker of chip-production equipment, reported increasing orders.

Bernanke said ``inflation pressures are beginning to diminish'' because of falling energy and commodity prices. The comments allayed concern that signs of faster growth may force the central bank to raise interest rates.

``The market got pretty much what it wanted,'' said Christian Andreach, who helps manage about $15 billion at Manning & Napier Advisors in Fairport, New York. ``This commentary is supportive of decent economic growth and stable interest rates.''

The Dow average climbed 87.01, or 0.7 percent, to 12,741.86. The S&P 500 added 11.04, or 0.8 percent, to 1455.30, completing its best two-day advance since Sept. 26. The Nasdaq advanced 28.50, or 1.2 percent, to 2488.38.

Investors are confident that stocks will extend their gains, according to a gauge of investors' fear based on S&P 500 index options. The Chicago Board Options Exchange's SPX Volatility Index, or VIX, dropped as much as 6.2 percent to 9.70. A close at that level would have been the lowest since December 1993.

Positive Catalyst

Stock indexes shot up at 10 a.m. after Bernanke began his speech to the Senate Banking Committee. As the housing market shows signs of bottoming, household spending ``continues to be the mainstay'' of the economy's recent growth, he said.

``He gave a very solid report on the consumer and on inflation,'' said Quincy Krosby, who helps manage $325 billion as chief investment strategist at The Hartford in Hartford, Connecticut. ``Short of coming out and saying `We want to give you a rate cut just for the sake of a rate cut,' this is the best it could get.''

Interest-rate futures show traders see a 20 percent chance the Fed will lower borrowing costs by August after Bernanke's comments, up from 7 percent yesterday. Treasuries rose the most since September, while the dollar dropped to its lowest in almost six weeks against the euro following the Fed chairman's remarks.

Financial shares contributed the most to the S&P 500's advance among 24 industry groups. Citigroup rose 47 cents to $54.18, while JPMorgan added 47 cents to $51.42.

Oil Drops

Fed regional bank presidents William Poole, Sandra Pianalto and Richard Fisher said in separate speeches last week that inflation remained a concern and higher interest rates may be needed. Still, the drop in crude oil from its July high has given the central bank some breathing room.

Today, oil futures fell 1.8 percent to $58 a barrel in New York on forecasts for warmer weather in the eastern U.S. and a government report that showed some fuel supplies declined less than expected. Prices are down 5 percent this year.

Cheaper gasoline limited service station receipts in January, leaving retail sales unchanged after a 1.2 percent gain the previous month, according to the Commerce Department. The slower growth indicates spending is falling in line with the Fed's goal of achieving a moderate economic expansion that doesn't cause inflation to accelerate.

Almost two stocks rose for every one that fell on the NYSE. Some 1.52 billion shares changed hands on the Big Board, in line with the three-month daily average.

Chip Companies Rally

Chip-related companies jumped 1.9 percent as a group for the second-biggest advance among two dozen industries.

Applied Materials gained 70 cents to $18.89. Chief Executive Officer Mike Splinter said fiscal second-quarter orders will rise, helped by deals with makers of both dynamic random access memory, or DRAM, and flash memory. Some analysts had predicted a drop in orders of as much as 10 percent.

Rival KLA-Tencor Corp. increased 99 cents to $50.39. Intel Corp., the world's largest semiconductor maker, added 24 cents to $21.14. Advanced Micro Devices Inc., the second-biggest maker of personal-computer processors, rose 35 cents to $14.95.

Among other technology shares, Microsoft Corp. climbed 37 cents to $29.40. The software maker settled a case claiming it used its monopoly position to overcharge Iowa consumers for products including Windows, Word and Excel. Details of the settlement weren't immediately disclosed.

The shares also got a boost from Sanford C. Bernstein & Co. analyst Charles Di Bona, who wrote the stock may reach $37 because of ongoing buybacks, ``solid'' 2007 earnings and optimism for the new Vista operating system. He has an ``outperform'' rating on Microsoft.

Deere Forecast

Deere & Co. climbed to a record after the world's largest maker of farm equipment said net income last quarter rose to $1.04 a share from 99 cents a year earlier because of higher prices for tractors and combines. Analysts expected 81 cents, according to a survey by Bloomberg. The shares jumped $9.24, or 9 percent, to $111.91 for the best performance in the S&P 500.

Rival Agco Corp. increased $1.05 to $37.

Industrial companies were the best performers in the S&P 500 among 10 industry groups, gaining 1.5 percent.

Companies posted a 9.7 percent gain in fourth-quarter profit through yesterday, with 78 percent of the S&P 500 members having announced results, according to data from Bloomberg. Earnings this quarter will probably rise 4.1 percent, according to analysts' estimates. Average profits have climbed by at least 10 percent since the third quarter of 2002.

Bullishness

Bullishness on stocks climbed to a 10-month high as concern eased that economic growth is slowing, a Merrill Lynch & Co. survey of fund managers showed. A net 57 percent of investors questioned this month said they were ``overweight'' in equities. That's up from 47 percent in January and 50 percent in December.

CSX Corp. jumped the most since October 2001. The third- largest U.S. railroad raised its quarterly dividend by 20 percent and said it would spend as much as $2 billion to buy back shares. The stock surged $2.73, or 6.9 percent, to $42.10.

DaimlerChrysler AG's U.S.-traded shares climbed $5.33 to $69.78. The German automaker may sell or seek partners for its unprofitable Chrysler division. The company said Chrysler will cut 13,000 jobs, or 16 percent of the workforce, after posting a 2006 operating loss of 1.12 billion euros ($1.46 billion).

Losers

Coca-Cola Co. slipped 33 cents to $47.88. The world's largest soft-drink maker said volume in North America fell 2 percent in the fourth quarter, the worst performance in 2 1/2 years, and forecast ``weak'' volume in the first half of 2007.

Office Depot Inc. had the steepest loss in the S&P 500. The world's second-largest office-supplies retailer said annual earnings growth may moderate, sending the shares down $1.30, or 3.5 percent, to $36.21.

S&P 500 shares, called Spiders, gained 95 cents to $145.61. Nasdaq-100 Index tracking shares, known by their QQQQ symbol, rose 74 cents to $44.60.

S&P 500 futures expiring in March advanced 9.20 to 1458.60 on the Chicago Mercantile Exchange. Nasdaq-100 futures climbed 26.75 to 1822.75.

The Russell 2000 Index, a benchmark for companies with a median market value of $680 million, rose 0.2 percent to 813.99. The Dow Jones Wilshire 5000 Total Market Index, the broadest measure of U.S. shares, added 0.7 percent to 14,659.08. Based on its advance, the value of stocks increased by $126.8 billion.

Agco Corp. (AG US)
Advanced Micro Devices Inc. (AMD US)
Applied Materials Inc. (AMAT US)
Citigroup Inc. (C US)
Coca-Cola Co. (KO US)
CSX Corp. (CSX US)
DaimlerChrysler AG (DCX US)
Deere & Co. (DE US)
Intel Corp. (INTC US)
JPMorgan Chase & Co. (JPM US)
KLA-Tencor Corp. (KLAC US)
Microsoft Corp. (MSFT US)
Office Depot Inc. (ODP US)

To contact the reporter on this story: Michael Patterson in New York at mpatterson10@bloomberg.net.

Last Updated: February 14, 2007 17:01 EST