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Wall Street surges after inflation report

Wall Street resumed its recent advance Friday, as investors interpreted a government report of milder inflation as a signal that the Federal Reserve might consider cutting interest rates later this year. The Dow Jones industrial average rallied 111 points and scored its fifth straight weekly gain.
/ Source: The Associated Press

Wall Street resumed its recent advance Friday, as investors interpreted a government report of milder inflation as a signal that the Federal Reserve might consider cutting interest rates later this year. The Dow Jones industrial average rallied 111 points and scored its fifth straight weekly gain.

Investors were encouraged after the Labor Department’s producer price index — which measures the rate of inflation experienced by manufacturers when they purchase goods — suggested inflation is moderating. This raised hopes on Wall Street that central bankers won’t need to hike interest rates to keep the economy in check, and might even lean toward lowering them.

With corporate earnings reports slowing, the market has put more weight on economic data to help find a direction. The fresh batch of economic reports could help assure central bankers that they have navigated the economy toward a soft landing in which growth slows enough to restrain inflation.

The stronger economic news, especially about inflation, injected a new dose of confidence that central bankers can now begin to mull a rate cut. It also helped reignite a rally stopped short Thursday after retail sales reports dimmed expectations about consumer confidence.

“To some degree, the advance is in reaction to the sharp selling on Thursday,” said Richard Cripps, chief market strategist for Stifel Nicolaus. “The market was due for a blowoff, and I think the data you got this morning don’t get in the way of the positive trend under way. A fair amount of investors want to be in the market.”

The Dow Jones industrial average advanced 111.09 points, or 0.84 percent — the biggest point rise so far this month. The index gained back most of the nearly 150 points it lost Thursday. It had reached a record Wednesday, its 21st record close since the start of the year and 43rd since the beginning of October.

The broader Standard & Poor’s 500-stock index rose 14.38 points, or 0.96 percent, and the Nasdaq composite index jumped 28.48 points, or 1.12 percent.

The Dow, which passed 13,300 for the first time Monday, rose 0.46 percent for the week; the S&P 500 gained 0.02 percent; and the Nasdaq fell 0.39 percent.

Treasury investors did not appear to believe the producer price data significantly raised the possibility of a rate cut. Bond prices fell, paring earlier gains after investors shrugged off the PPI and refocused on the rising stock market — which reduces the need for investment in safe-haven bonds. The 10-year yield rose to 4.68 percent, up from 4.64 percent late Thursday.

The dollar was mixed against other major currencies; gold rose.

The Labor Department’s producer price index rose to 0.7 percent in April, meeting Wall Street expectations and falling below the March reading of 1.0 percent. The core PPI, which excludes food and energy prices, was unchanged for the second month in a row.

“It looks like inflation is very tamed,” said Kim Caughey, equity research analyst at Fort Pitt Capital Group, adding that the PPI bodes well for next week’s consumer price index and makes a rate increase appear less likely.

The Federal Reserve on Wednesday left interest rates unchanged. Policy makers ended a campaign of 17-straight interest rate hikes in June.

Caughey noted, however, that although the Fed looks primarily at core inflation, rising fuel costs could still pose a problem for the stock market: “The wildcard is gasoline prices. They terribly affect consumers, and we have to remember they are 66 percent of our economy.”

Crude oil futures rose 56 cents to $62.37 a barrel on the New York Mercantile Exchange. The average U.S. retail price for a gallon of gasoline Friday was $3.042, according to AAA.

Consumer spending has been looking sluggish: the Commerce Department said retail sales unexpectedly fell in April by 0.2 percent, after rising an upwardly revised 1.0 percent in March. Originally, March sales were reported up 0.7 percent.

In corporate news, American International Group Inc. reported first-quarter profit rose 29 percent, but disclosed it would take a pretax charge from its subprime loan exposure. The world’s largest insurer — and one of the 30 companies that make up the Dow — rose 38 cents to $72.58.

Chicago Mercantile Exchange Holdings Inc. sweetened its offer for CBOT Holdings Inc. by more than 16 percent, hoping to head off a still-higher counteroffer from IntercontinentalExchange Holdings Inc.

Shares of the CBOT rose $7.35, or 3.8 percent, to $201.35, while the Chicago Merc added $38.35, or 7.7 percent, to $536.30. IntercontinentalExchange rose $5.70, or 4.2 percent, to $140.55.

Telecommunications equipment maker Alcatel-Lucent SA posted a loss of $10.8 million for the first quarter due to effects from the merger that formed the company. However, shares jumped 57 cents, or 4.4 percent, to $13.57 after it promised a strong second half.

Overseas, Japan’s Nikkei stock average closed down 1.03 percent. Britain’s FTSE 100 rose 0.64 percent, Germany’s DAX index rose 0.86 percent and France’s CAC-40 rose 0.63 percent.