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msnbc.com
updated 6/16/2004 9:43:45 AM ET 2004-06-16T13:43:45

Investors put aside their nervousness about rising interest rates and sent stocks moderately higher Tuesday, buoyed by a key report on U.S. consumer prices that suggests the Federal Reserve will not take an aggressive stance toward raising rates at its next policy meeting later this month.

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Before the open, the government reported that the Consumer Price Index (CPI), the government’s most closely watched inflation gauge, shot up by 0.6 percent in May, sharply exceeding economists’ forecast for a gain of 0.4 percent.

But the “core” CPI number, which strips out volatile energy and food prices and is more closely watched by the Fed for inflation trends, advanced just 0.2 percent, matching economists’ forecasts. Analysts said the moderate increase suggests economic growth, and accompanying inflation, are not significant threats to the U.S. economy.

“I think the core number took a little concern out of the market,” said Joseph Battipaglia, chief investment officer at Ryan Beck & Co. “It doesn’t change the fact that interest rates will rise, but the pace that the Fed has to raise interest rates is the key question. This could call for the more measured pace.”

At the close of trading, the Dow Jones industrial average was up 45.70 points, or 0.4 percent, having added as much as 93 points earlier in the day. Microsoft and Merck were the Dow's strongest components, rising 1.9 percent and 2.2 percent respectively.

(MSNBC is a Microsoft-NBC joint venture.)

The broader Standard & Poor’s 500-stock index closed with a gain of 6.72 points, or 0.6 percent, but the tech-laden Nasdaq saw the day's biggest advance, finishing 25.61 points, or 1.3 percent, higher.

Tuesday's CPI report might allow the market to scale back its Fed tightening expectations for a time, but the annual inflation rate will begin to climb again by the end of the summer observed Steve Stanley, chief economist at RBS Greenwich Capital. Stanley said he expects to see the inflation rate surpass 2 percent by the end of the year.

But some analysts feel energy prices may soon come under control, removing one of inflation’s biggest drivers. They point to the fact that the Organization of Petroleum Exporting Countries has promised to increase output to combat higher oil prices, and gasoline prices fell last week for the first time since mid-December.

A bigger-than-forecast report on U.S. retail sales fanned fears Monday that rapidly growing inflation could force the Federal Reserve to lift interest rates at its June 29-30 policy meeting for the first time in four years by a half percentage point, instead of the quarter point Wall Street is expecting.

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Tuesday’s CPI report eased those fears. Greenspan made no direct mention of the Fed’s interest-rate timetable during prepared comments before a Senate Banking Committee hearing Tuesday morning on his nomination to a fifth term as Federal Reserve chairman.

However, in a question and answer period following his prepared statement, Greenspan repeated comments made last week that Fed policy-makers probably can boost interest rates gradually to head off inflation, but he didn’t rule out taking more aggressive measures. He added that, short-term, inflation is not a serious concern.

Shares of Gateway jumped 22.62 percent to $4.50 after the PC maker raised its quarterly revenue outlook and forecast a narrower operating loss.

Oracle, the world’s second-largest software maker, saw its share price rise 1.4 percent to $11.71 ahead of its earnings report, which was released after the bell. Oracle posted a higher quarterly profit driven by improved sales of its flagship high-end database software, as corporate spending on technology improved.

Before the open, U.S. investment bank Lehman Brothers Holdings reported a 39 percent rise in quarterly profit as revenue from equity underwriting and certain types of financing transactions remained strong, despite higher interest rates. Lehman’s share price fell 4 percent to $73.02.

Also, shares of aerospace firm Boeing rose 0.9 percent to $49.25 after the Pentagon awarded the company a $3.89 billion contract to develop a new long-range patrol aircraft for the Navy to replace Lockheed Martin Corp.'s P-3 Orion. Lockheed’s share price was down 1.2 percent at $49.84.

Home furnishings retailer Pier 1 Imports said its quarterly profit fell more than 60 percent after two months of declining sales, with holiday promotions in May failing to generate expected business. Still, its share price rose 3 percent to $17.47.

And software maker Red Hat said its chief financial officer, Kevin Thompson, is leaving the company to pursue other interests. The Linux software leader’s shares dropped 9.2 percent to $22.06 on the news.

While the CPI report took the economic spotlight Tuesday, other economic data were released, including the New York Federal Reserve releases its Empire State Manufacturing Survey for June, which was unchanged at 30.2 in June. The index measures business conditions for New York-area manufacturers.

Shortly after the open, the University of Michigan’s preliminary June results for its survey of consumer sentiment rose to 95.2 after May's final reading of 90.2, well above analysts' estimates. Another report showed manufacturing and trade inventories rose 0.5 percent in April. And an industry trade group said U.S. homebuilder optimism is waning.

U.S. Treasury debt prices surged and the dollar fell against the euro. European market indices closed Tuesday with moderate gains, and overnight in Tokyo stocks fell for the third session in a row, hurt by worries that the U.S. CPI data could prompt faster-than-expected interest rate rises and cool demand in Japan’s main export market.

Reuters and the Associated Press contributed to this report.

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