Stocks jumped on Thursday, building on Wednesday's gains amid short covering, a fresh batch of economic data, and tame words on inflation by Federal Reserve Chairman Ben Bernanke. The recovery reflects sentiment that worries about inflation and higher interest rates have been digested, says Standard & Poor's Equity Research.
The Dow Jones industrial average jumped 198.27 points, or 1.83%, to 11,015.19, paced by Caterpillar (CAT). The broader Standard & Poor's 500 index rose 26.12 points, or 2.12%, to 1,256.16. The tech-heavy Nasdaq composite climbed 58.15 points, or 2.79%, to 2,144.15.
Short covering in the wake of solid earnings by investment bankers this week had a hand in the rally, says Action Economics. Fed Chairman Bernanke spoke, but didn't spook the market, saying longer-term inflation expectations "bear watching." Says Action Economics: "The speech and Q&A by Bernanke also largely avoided major pitfalls that could rattle investors and appeared a little more even-handed on the topic of inflation gaining traction from higher energy prices."
Other Fed speakers on Thursday included Boston Fed President Cathy Minehan, who said domestic inflation is increasingly affected by global forces. Meanwhile, Fed Governor Randall Kroszner stayed away from policy in a speech before a banker's assocation. The Fed is widely expected to raise interest rates when it meets June 28 and 29.
Solid economic reports were in the spotlight Thursday. Initial jobless claims unexpectedly fell 8,000 to 295,000 in the week ended June 10. The Empire State index of manufacturing activity surged to 29.01 in June, more than triple the expected reading, according to Action Economics, while the Philadelphia Fed index slipped to 13.1 from 14.4 in May. Industrial production dropped 0.1% in May after rising 0.8% in April.
The lower industrial production number is no cause for worries about economic growth, some analysts say. "Despite the decline, the three-month growth rate in manufactured production is fairly robust at 4.4%," notes John Ryding, chief U.S. economist at Bear Stearns. "Although capacity utilization slackened a little in May, it is still significantly above its long-run average and likely to be a concern to the Fed from an inflation perspective."
Reports coming Friday include the preliminary June reading for University of Michigan consumer sentiment, whihc is expected to stay fairly stable at 79.0 from 79.1. The first quarter current account deficit is expected to moderate to $222 billion from the fourth quarter's record of $225 billion.
Among stocks in focus Thursday, Bear Stearns (BSC) gained ground after the brokerage reported an 83% jump in second-quarter profit.
Meanwhile, Goldman Sachs (GS) was higher after a consortium led by the brokerage raised its bid for Associated British Ports. Also reportedly bidding for the U.K. ports operator is a group led by Macquarie Bank.
Shares in Intel (INTC) also rose, extending the its gains the previous session after Goldman raised its recommendation on the chipmaker's stock to outperform.
On the downside, General Mills (GIS) was lower after the packaged foods maker lowered its earnings guidance for fiscal year 2007.
On the brokerage front, Morgan Stanley upgraded 3Com (COMS) from underweight to equal-weight. UBS Financial boosted SanDisk (SNDK) from neutral to buy.
In the energy markets Thursday, July West Texas Intermediate crude oil futures rose 36 cents to $69.50 a barrel.
European markets finished solidly higher. In London, the Financial Times-Stock Exchange 100 index advanced 112.5 points, or 2.04%, to 5,619.3. Germany's DAX index added 116.23 points, or 2.19%, to 5,422.22. In Paris, the CAC 40 index was up 109.14 points, or 2.36%, to 4,724.58.
Asian markets finished mostly higher after the Bank of Japan voted to keep interest rates at essentially zero. Japan's Nikkei 225 index rose 161.2 points, or 1.13%, to 14,470.76. In Hong Kong, the Hang Seng index climbed 187.16 points, or 1.23%, to 15,435.08. Korea's Kospi index slipped 2.33 points, or 0.19%, to 1,219.4.
Yields pressed higher as yesterday's core CPI gain was followed with another round of stronger data, signs of lower foreign demand for U.S. assets and firm-but-balanced Fedspeak on inflation risks ahead, says Action Economics. Equities rebounded aggressively and commodities generally sought equilibrium levels, which also reduced some safety premium on bonds as well, says Action Economics. The 10-year note yield rose to 5.098%.