Stocks Climb Despite Inflation Data

The Dow returned to positive territory for 2006, while the Nasdaq broke an eight-day losing streak. But a key inflation indicator rose more than expected

Stocks got a reprieve from their recent woes Wednesday, finishing broadly higher despite a surprisingly firm reading on consumer inflation. The gains reflected bargain-hunting and a sense that rising interest rates were already priced into the market, says Standard & Poor's Equity Research.

The Dow Jones industrial average climbed 110.78 points, or 1.03%, to 10,816.92, returning to positive territory for the year. The broader Standard & Poor's 500 index rose 6.35 points, or 0.52%, to 1,230.04. The tech-heavy Nasdaq composite was up 13.53 points, or 0.65%, to 2,086, snapping a streak of eight straight losing sessions.

Investors were assessing unexpectedly high inflation numbers Wednesday. The consumer price index (CPI) rose 0.4% in May, while the core index, which excludes food and energy, moved up 0.3%. The market has already priced in an interest-rate hike at the Fed's June 28-29 meeting, but the numbers should fan fears of further increases, says Action Economics.

The latest inflation data could spell more bad news for stocks, some analysts say. "Unfortunately, this is more confirmation of what the market has been fearing for a bit, and that is that there's going to be enough inflation data to cause the Fed to continue to raise rates," says Art Hogan, chief market analyst at Jefferies & Co. "The larger picture there isn't necessarily how high the fed funds rate goes, but what it does to the economy in terms of slowing down, and what that does to corporate profits."

Rising rent prices contributed to the core CPI reading, analysts say. "While no measure of inflation is perfect, the broad range of inflation data is telling us the same thing -- inflation pressures are rising," notes Lehman Brothers economist Drew Matus.

Still, stocks are trading at low valuations compared to historical levels, others say. "There is some good upside in this market," says David Chalupnik, head of equities at First American Funds. "The question becomes when are we going to realize it. I think we've got to get through the Fed hike at the end of this month."

In other economic news, the Fed's Beige Book report said economic activity continues to expand but shows signs of slowing. The report closely matched expectations, says Action Economics.

Fed officials were also giving speeches, with remarks still on tap after the close from Boston Fed President Cathy Minehan. Fed Governor Susan Bies acknowledged a cool-down in the housing market, while Dallas Fed President Richard Fisher said the Fed needs to be "relentlessly bird-dogging inflation."

The economic calendar looks to be full again Thursday. Reports are due on industrial production, regional manufacturing activity, and initial jobless claims, among other data. Fed Chairman Ben Bernanke is set to speak, along with Minehan and Fed Governor Randall Kroszner.

On the company side, airplane maker Boeing (BA) led the Dow higher as rival Airbus encountered delays with its 380 aircraft. Shares of Airbus parent European Aeronautic, Defence & Space Co. tumbled in Paris trading.

A broker call boosted shares in several chipmakers. Goldman Sachs upgraded select semiconductor stocks, including Intel (INTC), SanDisk (SNDK), Advanced Micro Devices (AMD) and Applied Materials (AMAT).

Oil giant Exxon Mobil (XOM) was higher after falling to its lowest level since Dec. 20, as oil prices recovered from their recent slump.

On the downside, shares in Charles Schwab (SCHW) fell after the broker said it plans to cut and simplify prices for institutional and retail customers.

Rival E*Trade Financial (ET) was also lower after reporting that daily average revenue trades fell 3% in May amid weakness in global stock markets.

Among other stocks in focus, Casey's General Stores (CASY) was up sharply after the convenience-store chain increased its dividend and reported a quarterly profit that topped Street forecasts.

In the energy markets Wednesday, July West Texas Intermediate crude oil futures closed up 58 cents at $69.14 a barrel, after a weekly inventory report showed that crude supplies unexpectedly fell 900,000 barrels.

European markets finished mixed. In London, the Financial Times-Stock Exchange 100 index slipped 12.8 points, or 0.23%, to 5,506.8. Germany's DAX index rose 13.85 points, or 0.26%, to 5,305.99. In Paris, the CAC 40 index inched down 2.15 points, or 0.05%, to 4,615.44.

Asian markets finished higher. Japan's Nikkei 225 index bounced 90.96 points, or 0.64%, to 14,309.56. In Hong Kong, the Hang Seng index inched higher 13.5 points, or 0.09%, to 15,247.92. Korea's Kospi index rebounded 17.87 points, or 1.48%, to 1,221.73.

Treasury Market

Treasury yields jumped higher after the strong inflation data and hawkish Fed comments. The 10-year note fell to 100-18/32 for a yield of 5.05%, while the 30-year bond dropped to 91-02/32 for a yield of 5.09%.

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