updated 8/16/2006 9:52:11 AM ET 2006-08-16T13:52:11

Relieved investors sent stocks soaring Tuesday, with the Dow Jones industrials climbing more than 130 points after the Labor Department reported an unexpected drop in core wholesale prices that renewed confidence in the Federal Reserve’s stance on interest rates and inflation.

Major Market Indices

Prices at the wholesale level, with food and fuel prices removed, fell 0.3 percent in July, the best showing for core inflation in nine months. Overall, wholesale prices edged up 0.1 percent, well below the 0.5 percent jump in June.

The report lifted the pall that has hung over the markets all summer, brought on as investors fretted about inflation and whether the Federal Reserve’s pause in rate hikes last week would be short-lived. With prices falling, however, the Fed under new Chairman Ben Bernanke could engineer the “soft landing” Wall Street was looking for, balancing slower economic growth with inflation pressures and leaving corporate profits relatively intact.

“I think the feeling here in the market is that the Fed may have actually nailed it,” said Bill Groenveld, head trader for vFinance Investments. “Of course, now we have to take a close look at earnings and hope they’ll still be OK, but right now, overall you have to feel pretty good. I think this market could get exciting.”

At the close of trading, the Dow Jones industrial average rose 132.39, or 1.19 percent, to 11,230.26.

Broader stock indicators also advanced. The Standard & Poor’s 500 index rose 17.36, or 1.37 percent, to 1,285.57, while the Nasdaq composite index gained 45.97, or 2.22 percent, to 2,115.01.

Bonds rose sharply on the government’s inflation report, with the yield on the benchmark 10-year Treasury falling to 4.95 percent from 5 percent late Monday. The dollar fell against most major currencies, while gold prices also slid.

Crude prices edged lower, with a barrel of light crude quoted at $73.05, down 48 cents, on the New York Mercantile Exchange.

The markets got additional support from a New York Federal Reserve report showing manufacturing activity in the region declined this month. The news added to growing evidence of a moderating economy, which would also serve to keep prices moderate and further encourage the Fed to avoid raising rates.

Still, another Labor Department pricing report, the consumer price index, is due Wednesday, and while the PPI number bodes well for the CPI, there’s still a chance that lower prices have yet to work their way through to the average consumer.

“This is nice right now, with PPI and lower oil and good earnings, but all that could change tomorrow if you get a higher CPI number,” said Brian Williamson, an equity trader at The Boston Company Asset Management. “Volume is good, but still a little light, so you may be seeing some people holding off on moving until tomorrow’s number.”

In corporate news, shares in Dell Inc. rose despite the announcement from the Round Rock, Texas, company that it would recall some 4.1 million notebook batteries made by Sony Corp. because they can burst into flames.

Wal-Mart Stores Inc. shares slid after the world’s largest retailer posted its first profit decline in a decade as the cost of selling its German operation pulled second-quarter earnings down 26 percent.

Jones Apparel Group Inc. also dipped after a report Tuesday indicated the apparel-maker and retailer would stop seeking to auction itself off after no buyer came forward.

Shares in Atlanta-based Home Depot Inc. rose after the home improvement retailer posted strong earnings.

Overseas, Japan’s Nikkei stock average fell 2.6 percent, Britain’s FTSE 100 was up 0.46 percent, Germany’s DAX index was up 1.49 percent and France’s CAC-40 was up 1.35 percent.

© 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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