Stocks Rally on Bernanke, Profits

The Fed chairman's soothing testimony eclipsed slightly stronger-than-expected inflation data. Also in focus: Yahoo, IBM, J.P. Morgan

Stocks finished sharply higher Wednesday, as remarks from Federal Reserve Chairman Ben Bernanke eased inflation worries and oil prices declined. Upbeat blue-chip earnings and bullish market internals also likely bolstered stock prices, says Standard & Poor's Equity Research.

The Dow Jones industrial average rose 212.19 points, or 1.96%, to 11,011.42, its best one-day point gain since June 29, with only Altria (MO) finishing in the red. The broader Standard & Poor's 500 climbed 22.95 points, or 1.86%, to 1,259.81. The tech-heavy Nasdaq composite added 37.49 points, or 1.83%, to 2,080.71.

NYSE breadth was decidedly positive, with 29 issues advancing for every five declining, while NASDAQ breadth was 23-7 positive. Trading volume was active.

Bernake's testimony before Congress was the main event Wednesday. The Fed chief said slowing economic growth would limit inflation, adding that "policy must be flexible and ready to adjust to changes in economic projections."

The Fed now seems likely to pause after raising interest rates one more time at its Aug. 8 meeting, some observers say. "When inflation is running above the 1-2% 'comfort zone' and the course of future policy is in doubt, it is safer for a central banker to hike," Goldman Sachs analysts note in a dispatch to clients. "Given Bernanke's comments on the effects of policy lags, however, additional hikes beyond August look unlikely."

Others argue that Bernanke's optimism on inflation could be misguided. The central banker was wrong in April when he telegraphed the possibility of a pause, and "he's going to be wrong again," says Bob Ried, president of Ried Thunberg. "To the extent that he is, he's going to develop a credibility problem."

Bernanke's comments overshadowed a firm inflation reading. The overall consumer price index increased 0.2%, while the core index, which excludes food and energy, rose 0.3%, slightly above expectations. The solid core inflation reading may keep pressure on the Fed to continue raising interest rates. "The FOMC will have a difficult meeting on Aug. 8," says economic research outfit Action Economics.

In other economic data, housing starts fell 5.3% to 1.85 million in June, the Commerce Department said. The decline was wider than Street expectations, adding to concerns about a cooling housing market. Releases on weekly jobless claims, June leading indicators and the July Philadelphia Fed index are due Thursday.

The economy still has as high as a 40% chance of recession, according to Merrill Lynch. "These odds have doubled since the start of the year and are still rising, between the run up in oil prices, the nonstop Fed tightening cycle, the turndown in residential real estate andthe sputtering stock market," writes David Rosenberg, North American economist at Merrill, in a July 18 report.

On the company side, Yahoo (YHOO) shares touched a 52-week low after the Internet media company delayed the release of new advertising software and reported a nearly 80% drop in second-quarter profit. J.P. Morgan downgraded the stock from overweight to neutral.

A pair of Dow members posted strong earnings. IBM (IBM) was higher after the computer maker posted an 11% rise in second-quarter net income, while shares in J.P. Morgan Chase (JPM) rose after the third-largest U.S. bank said its second-quarter earnings more than tripled.

Meanwhile, Bank of America (BAC was also up after the company posted 18% higher second-quarter profit, helped by its acquisition of credit-card company MBNA.

Shares in Southwest Airlines (LUV) rose after the airline said its second-quarter profit more than doubled on increased traffic, higher fares and the reduction of fuel costs using hedging strategies.

Traders were awaiting earnings reports after the close from Apple (AAPL), eBay (EBAY), Intel (INTC), Motorola (MOT), and Qualcomm (QCOM).

Dow members slated to post quarterly results Thursday include Honeywell (HON) and Microsoft (MSFT). Tech bellwethers Advanced Micro Devices (AMD) and Google (GOOG) are also due to report, along with automaker Ford (F).

Outside of earnings Wednesday, HCA (HCA) was higher on a report a huge leveraged buyout plan for the hospital operator fell apart in late stages of negotiation.

In the energy markets, August West Texas Intermediate crude oil futures closed down 88 cents at $72.66 after a weekly inventory report showed that crude supplies declined less than expected.

European markets finished sharply higher. In London, the Financial Times-Stock Exchange 100 index rose 96.3 points, or 1.69%, to 5,778. Germany's DAX index rallied 142.44 points, or 2.64%, to 5,539.29. In Paris, the CAC 40 index was up 112 points, or 2.37%, to 4,846.54.

Asian markets finished modestly higher. Japan's Nikkei 225 index advanced 63.02 points, or 0.44%, to 14,500.26. In Hong Kong, the Hang Seng index gained 53.6 points, or 0.33%, to 16,097.54. Korea's Kospi index edged up 0.23 points, or 0.02%, to 1,233.65.

Treasury Market

Treasury yields dipped on Bernanke's testimony after climbing at the open on the slightly firmer-than-expected core CPI reading. The 10-year note rose in price to 100-16/32 for a yield of 5.05%, while the 30-year bond climbed to 90-28/32 for a yield of 5.1%

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