Another day, another market rally fueled by mild inflation numbers. Stocks finished broadly higher Wednesday for a second straight session, with major indexes reclaiming their May heights as reports on consumer inflation and the housing market provided further signs of a slowing economy. Still, it remains uncertain whether the Federal Reserve will have to raise interest rates again this year, says Standard & Poor's Equity Research.
The Dow Jones industrial average rose 96.62 points, or 0.86%, to 11,326.88, its highest closing level since May 16, paced by Caterpillar (CAT). The broader Standard & Poor's 500 added 9.1 points, or 0.71%, to 1,294.68, its highest since May 11. The tech-heavy Nasdaq composite climbed 28.29 points, or 1.34%, to 2,143.3.
NYSE breadth was decidedly positive, with 26 issues advancing for every 8 declining. Nasdaq breadth was 20-10 positive.
Investors were digesting another set of economic figures Wednesday. The overall consumer price index, or CPI, rose 0.4%, while the core CPI edged up 0.2%, in line with expectations. Housing starts fell 2.5% in July, a bigger drop than projected. Meanwhile, industrial production rose 0.4% in July.
The moderate inflation data, coupled with yesterday's tame producer price index reading, could help forestall additional Fed interest-rate hikes, analysts say. "The softer core inflation data provide some comfort to Fed officials regarding their decision to pause on Aug. 8, and gives them a bit of breathing room in terms of the September meeting," says Goldman Sachs. "That said, the underlying drivers of inflation remain sources of worry."
Others expect the Fed to raise interest rates later in 2006. "The rate [of inflation] is still accelerating, suggesting another Fed rate hike in September unless the August data show a clear slowdown," says David Wyss, chief economist at Standard & Poor's.
Nevertheless, technical indicators suggest stocks' rally may not have much further to go, others say. "It's not the time to be buying if looking out over the longer term," says David Solin, a partner at Foreign Exchange Analytics.
Elsewhere on the economic front, Dallas Fed President Richard Fisher said monetary policy and the economy are at a "crossroads." Though Fisher is a non-voting Fed president, his remarks were somewhat hawkish on inflation, says Action Economics.
Thursday is set to be another busy day for economic data, with releases including weekly jobless claims, July leading economic indicators, and the August reading of the Philadelphia Fed index of regional business activity.
On the company side Wednesday, General Motors (GM) was higher despite news the automaker's second-biggest investor, Capital Research & Management, reduced its stake by 24% in the second quarter.
Shares of Home Depot (HD) were little changed after falling in early trading as Morgan Stanley cut its earnings estimates for the home-furnishings retailer.
Semiconductor equipment maker Applied Materials (AMAT) was modestly higher after posting a 29% increase in fiscal third-quarter profit.
Clothing retailer Abercrombie & Fitch (ANF) was up sharply on a 14% increase in second-quarter profit, beating analyst estimates.
Among companies set to report quarterly results after the close is Dow member Hewlett-Packard (HPQ). Rival Dell (DELL) is scheduled to post earnings Thursday.
In the energy markets Wednesday, September West Texas Intermediate crude oil futures closed down $1.16 at $71.89 a barrel despite a weekly inventory report showing a modestly larger than expected decline in oil supplies.
European markets finished mostly higher. In London, the Financial Times-Stock Exchange 100 index edged down 1.3 points, or 0.02%, to 5,896.6. Germany's DAX index rose 36.14 points, or 0.63%, to 5,812.94. In Paris, the CAC 40 index was up 22.29 points, or 0.44%, to 5,137.31.
Asian markets finished sharply higher. Japan's Nikkei 225 index shot up 255.17 points, or 1.61%, to 16,071.36. In Hong Kong, the Hang Seng index advanced 176.96 points, or 1.02%, to 17,451.03. Korea's Kospi index climbed 20.5 points, or 1.58%, to 1,315.61.
Treasury yields dropped after the inflation and housing starts data. The 10-year note rose in price to 100-02/32 for a yield of 4.87%, while the 30-year bond climbed to 92-11/32 for a yield of 5%.