updated 7/7/2006 7:08:50 AM ET 2006-07-07T11:08:50

Wall Street finished Thursday mostly higher, as mild economic and retail sales data brightened the outlook for interest rates, helping stocks recover steep losses in the prior session.

Major Market Indices

Retailers had slower sales growth last month , a sign that high gasoline prices and rising lending rates were straining consumer spending. The results fed optimism that the Federal Reserve may have lifted rates enough to contain economic growth and inflation.

A bigger-than-forecast drop in service sector growth further reinforced the interest rate outlook, as did a slight dip in weekly unemployment claims . Coupled with lower oil prices, the latest round of data helped stocks recover sharp losses in Wednesday’s session.

But many on Wall Street were already looking ahead to Friday’s Labor Department report on employment, which gives critical readings on monthly job growth and wage increases. Numbers too far above or below expectations could reignite worries about inflation and economic growth, said Ken Tower, chief market strategist for Schwab’s CyberTrader.

“It’s really a fine line,” Tower said. “Too much good news fires up this inflation fear and suggests the Fed will have to keep raising rates. Too much of a slowdown threatens profits.”

The Dow Jones industrial average was the day’s strongest performer, rising 73.48 points, or 0.66 percent, having slumped more than 76 points Wednesday on concerns about North Korea’s missile launch and rising oil prices. The broader Standard & Poor’s 500-stock index gained 3.16 points, or 0.25 percent, while the Nasdaq composite index added 1.75 points, or 0.08 percent.

Bonds gained ground, with the yield on the 10-year Treasury note down to 5.19 percent from 5.22 percent late Wednesday. The U.S. dollar fell against the Japanese yen, and gold prices edged up to about $635 an ounce.

Crude oil futures eased after nervousness about political tensions with North Korea and gasoline supplies propelled prices to a new intraday high Wednesday. Although a government report showed shrinking crude reserves, inventories of refined products increased.

In economic news, the Institute for Supply Management said its services index fell 3.1 points to 57, below economists’ forecast of 59. A sharp drop in the prices paid component to 73.9 built helped soothe inflation fears.

First-time applications for jobless benefits slipped by 2,000 to 313,000 last week, the Labor Department said. Fewer average claims in June suggested a possible rebound in monthly job growth, the department noted.

And once the market digests Friday’s employment data, the second-quarter earnings season gets under way next week with results from aluminum producer Alcoa Inc. Monday afternoon. Investors will be looking for the impact of energy prices and interest rates on corporate profits.

“It’s no secret we’re looking at another round of solid data and double-digit returns,” said Peter Cardillo, chief strategist for S.W. Bach & Co. “Some of that is probably already priced into the market. It will likely lead us to a slightly higher trading range in the coming weeks.”

Retailers reported slower sales growth last month, a sign that high gasoline prices and rising lending rates are restraining consumer spending. Investors have been looking for a consumer slowdown to take the economy with it.

The results nonetheless dragged on some stocks. Dow component Wal-Mart Stores Inc., whose low-income customers are most vulnerable to high energy costs, said its sales rose 1.2 percent in June, below estimates of 2 percent. Wal-Mart dropped 30 cents to $46.72.

Rival discounter Target Corp. posted sales of 4.8 percent to top predictions of 4.3 percent. Target rose 90 cents to $49.17.

JCPenney Co. saw a 4.3 percent rise in same-store sales, easily beating forecasts of 2.8 percent. Penney rose 27 cents to $67.65.

Elsewhere, cigarette makers gained after the Florida Supreme Court dropped a $145 billion verdict against tobacco companies, saying the award was excessive. Altria surged $4.43 to $77.76.

Overseas, North Korea worries sent Japan’s Nikkei stock average falling 1.3 percent. Britain’s FTSE 100 rose 1.09 percent, Germany’s DAX index advanced 1.24 percent and France’s CAC-40 was higher by 0.92 percent as traders responded to the gains on U.S. markets.

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