Wall Street gave up a big early advance as the price of oil rose Thursday, with stocks closing moderately higher but also demonstrating how anxious investors are about inflation and the overall health of the economy. Bond prices fell sharply and yields shot higher in response to an upbeat retail sales report.
Word late in the session that Yahoo Inc. called off talks of any deal with Microsoft Corp. gave investors one more reason to rein in the enthusiasm that drove the day’s early rally.
Advancing oil prices, which have frequently sent stocks tumbling in recent weeks, stifled the optimistic mood that followed the Commerce Department’s report that retail sales rose 1 percent in May. The gain marked the biggest improvement in six months and it offered some investors hope that the government’s 57 million economic stimulus checks were indeed oiling the economy. A buyout bid for Anheuser-Busch Cos. also lifted stocks.
But the turnaround in oil set off renewed worries about inflation and its effect on the economy. And a management shakeup at Lehman Brothers Holdings Inc. drew fresh attention to troubles in the financial sector. Lehman, which earlier this week said it would report a quarterly loss of $2.8 billion, on Thursday ousted its chief financial officer and chief operating officer. Lehman fell $1.05, or 4.4 percent, to $22.70.
The Dow rose 57.81, or 0.48 percent, to 12,141.58 after being up as much as 185 points earlier. The advance came a day after the Dow fell more than 200 points because of surging oil prices.
Broader stock indicators ended higher Thursday after dipping into negative territory late in the session. The Standard & Poor’s 500 index rose 4.38, or 0.33 percent, to 1,339.87, while the Nasdaq composite index rose 10.34, or 0.43 percent, to 2,404.35.
Bond prices fell Thursday as some investors left the safety of government debt. The yield on the benchmark 10-year Treasury note, which moves opposite its prices, soared to 4.21 percent from 4.07 percent late Wednesday.
The dollar rose against other major currencies, while gold prices fell.
Light, sweet crude rose 36 cents to settle at $136.74 a barrel on the New York Mercantile Exchange. Oil prices, which have been volatile lately, fell then bounced higher Thursday amid concerns about supply disruptions.
In corporate news, Yahoo fell $2.63, or 10.1 percent, to $23.52 after saying its efforts to restart takeover discussions with Microsoft failed. Yahoo is expected to announce it struck an agreement to hand over a piece of its online ad platform to Internet search leader Google Inc. Microsoft rose $1.12 to $28.24.
(Msnbc.com is a joint venture of Microsoft and NBC Universal.)
Belgian Brewer InBev SA, whose brands include Beck’s and Stella Artois, offered late Wednesday to buy Anheuser-Busch, the maker of Budweiser, Bud Light and other brands for $65 per share. Anheuser-Busch rose $3.05, or 5.2 percent, to $61.40.
Citigroup Inc. is closing a hedge fund co-founded by current chief executive Vikram Pandit. Pandit joined Citi have selling Old Lane Partners in July 2007. Citi rose 68 cents, or 3.5 percent, to $19.89.
The day’s economic numbers were enough to persuade some investors to buy after several tough sessions, including a 400-point decline Friday, when oil prices surged.
“I think expectations since last Friday have been grinding so low that any bit of news is taken with a huge lift,” said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. “I just think that emotions are so fragile right now that it’s creating these exacerbated market moves.”
Investors also got another signal the Federal Reserve is poised to reverse recent policy and begin raising key interest rates. In addition to comments released Wednesday afternoon with its Beige Book economic that pointed to no rate cut at the June 24-25 meeting, Charles Plosser, the president of the Philadelphia Federal Reserve Bank, said in an interview on CNBC there is “no question” the Fed will have to raise rates to curb inflation before it gets “out of control.”
While the timing of such a move cannot be predicted, Plosser said, “We have to be very careful that we don’t slip into a situation where we create inflation and support higher prices,” but the timing of any move is still an “open question.”
While the market typically prefers interest rate cuts to hikes, some investors seem to be hoping for an increase that would ease the threat of inflation.
Oscar Gonzalez, an economist with John Hancock Financial Services, said concerns about accelerating inflation are “very clear,” based on surveys of professionals, consumers and producers and manufacturers, along with continually increasing commodity prices.
“The risks of inflation triggered by too low interest rates has increased dramatically since the first quarter,” Gonzalez said. “Obviously it’s showing up in their radar screen.”
Advancing issues narrowly outnumbered decliners on the New York Stock Exchange, where volume came to 1.33 billion shares compared with 1.39 billion shares Wednesday.
The Russell 2000 index of smaller companies rose 1.96, or 0.27 percent, to 719.84.
Overseas, Japan’s Nikkei 225 average closed 2.08 percent higher. Britain’s FTSE 100 index closed up 1.17 percent, Germany’s DAX 30 index rose 0.97 percent, and the French CAC-40 index rose 0.24 percent.