Stocks Finish with Gains

A key inflation report arrives in line with market expectations, helping to calm the Street's rate-hike anxiety

Stocks advanced on Tuesday after inflation data arrived mostly in line with market estimates, helping to calm Wall Street's interest-rate hike fears. Traders also weighed comments on inflation by Federal Reserve Chairman Alan Greenspan.

The Dow Jones industrial average moved 45.70 points higher, or 0.44%, to 10,380.43. The broader Standard & Poor's 500-stock index gained 6.71 points, or 0.59%, to 1,132.00. The tech-heavy Nasdaq composite index was up 25.61 points, or 1.28%, to 1,995.60, though the index had rested above the 2,000-mark during most of the afternoon.

Stocks gave back some of their earlier gains following a bogus, late-session rumor of a terrorist threat in New York, reports S&P MarketScope. Steel, metal, gold and energy stocks rebounded from their Monday losses, while software stocks also recovered.

The week's headline economic report, the consumer price index (CPI), which measures inflation at the consumer level, arrived as expected, up 0.6% in May, with the core index, which excludes food and energy prices, up 0.2%, also close to target. A stronger-than-expected CPI would have increased the Street's angst that the Fed would raise interest rates more aggressively on June 30.

On a year-over-year basis, the overall CPI was up 3.1% (vs. a prior 2.3%), with the core rate higher by 1.7% (vs. 1.8%). The core measure "ticked down before reaching the 2.0% mark that is likely to heighten inflation concern on the [Federal Reserve] Board," reports economic research firm, Informa Global Markets. Not surprising, gas prices rose 8.1%, and food prices added 0.9%.

Meanwhile, April business inventories rose 0.5% -- in line with expectations -- vs. a 0.7% rise in March and a 0.8% spike in February. This is "still reflective of a sound economic backdrop," says Informa, noting that total business inventories were up 3% year-over-year in April. Sales declined 0.1% in April, vs. a revised 3.2% (from 2.9%) spike in March.

A read on manufacturing activity in the New York area, the Empire State Manufacturing Survey, showed the general business conditions index at 30.2, unchanged from May. Business sentiment, price, and hiring components of the report all posted gains.

The preliminary June University of Michigan consumer sentiment index was firmer than expected, at 95.2, vs. a late May reading of 90.2. The economic (current) conditions index is at 108.1 vs. a prior 103.6, while the outlook index came in at 86.9 vs. a prior 81.6.

Traders also listened for any indication of the Federal Reserve's June rate leanings from Fed chief Greenspan, who addressed the Senate Banking Committee. During a Q&A with panel members, Greenspan says that the the general view is that inflationary pressures are "not likely to be a serious concern ahead" and therefore, policy is likely to be "measured," reports S&P's MarketScope.

In corporate news, brokerage house Lehman Brothers (LEH ) reported second quarter earnings of $2.01 per share, vs. $1.67, on a 28% net revenue rise. Despite the strong quarter, shares traded 4% lower on concerns of rising costs and slowing growth.

In aerospace, the U.S. Navy awarded a $3.89 billion contract to a team led by Boeing (BA ) to build its Multi-Mission Maritime Aircraft (MMA), or submarine-seeking aircraft. The program's estimated value is about $15 billion over a 10-year production run. Boeing shares finished higher.

Red Hat (RHAT ) moved 9.2% lower on news that its chief financial officer, Kevin Thompson, resigns from the company to pursue other interests. Prudential downgraded the stock to neutral from overweight, while CS First Boston upgraded Red Hat to outperform from neutral.

Electronics retailer Circuit City (CC ) reported a first quarter loss of 3 cents per share, vs. a loss of 14 cents per share, on 6.4% higher comparable store sales, and 6.9% higher sales. S&P maintained its hold rating. Circuit City lost 2.5%.

In retail, Pier 1 Imports (PIR ) posted first quarter earnings per share of 13 cents, vs. 21 cents, on a 1.8% same store sales drop, and a 7.3% total sales rise. The company notes that sales slowed after the Easter holiday, and remained weak. Pier 1 sees its second quarter earnings per share as high as 14 cents, on a 2% to 4% same store sales drop. Shares gained 3%.

Quiksilver (ZQK ) posted second quarter earnings of 47 cents, vs. 40 cents on a 23% rise in total revenue. The company raised its third quarter revenue forecast to an upward range of $305 million, and sees its 2004 EPS as high as $1.29. Piper Jaffray increased its estimates and target. Quiksilver rose 6.7%.

Trucking firm, Yellow Roadway (YELL ), raised its second quarter EPS guidance to a range of 85 cents to 90 cents, from an upward range of 75 cents. S&P reiterated its accumulate rating. Shares rose 2.8%.

Database software company Oracle (ORCL ) was higher prior to its May-quarter results after today's close of trade.

In earnings news this week, retailer Best Buy (BBY ), tech firm Jabil (JBL ), and brokerage Bear Stearns (BSC ) are set to report on Wednesday. And on Thursday, results are expected from software outfit Adobe (ADBE ).

Economic news this week may include the producer price index (PPI) on Wednesday -- which was delayed from last week -- depending on how quickly the Bureau of Labor Statistics can crunch its numbers. On Thursday, traders get a read on housing starts, which are seen showing a slight heating up in new home construction in May. The number of units is forecast to grow to a 1.98 million annual pace from 1.969 million in April.

Treasury Market

Treasuries enjoyed a strong rally on Tuesday, following a benign read of inflation at the consumer level, and a sense that the Fed won't move too aggresively with its expected rate hikes. Market players are believers, again, in a "measured" pace of tightening, reports Informa. Interest-rate futures were pricing in a 14% chance of a 50 basis point (one-half percent) rate hike at the Fed's June meeting, down from 32% prior to the CPI release.

In currencies, the dollar was slightly weaker after a stronger-than-expected CPI. The euro was at $1.210 to the dollar, the British pound was at $1.821. The dollar was at 110.44 Japanese yen.

World Markets

European stock markets finished higher on Tuesday. London's Financial Times-Stock Exchange 100 index was up 25.4 points, or 0.57%, at 4,458.60, on news that U.K. CPI rose at a 1.5% annual rate, while house price increases eased for the first time in six months. The Bank of England's Mervyn King is worried about the risk of a sharp correction in consumer spending if there is a sharp downturn in the housing market, reports MarketScope. British Airways was higher on lower oil prices.

In Paris, the CAC 40 added 36.33 points, or 1%, to 3,683.43. Germany's DAX index gained 38.65 points, or 0.98%, to 3,987.30. In auto news, DaimlerChrysler and Volkswagen were trading lower after reporting declines in European new car registrations. BMW was lower despite higher registrations.

Asian stock markets ended lower. Japan's Nikkei 225 index shed 103.96 points, or 0.9%, to 11,387.7, with traders catching New York's Monday Fed Rate fears. Carmakers bucked the downtrend on optimism over increasing sales in the U.S., reports MarketScope.

In Hong Kong, the Hang Seng index moved 25.88 points lower, or 0.21%, to finish at 12,050.69, on rate rise concerns.

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