NEW YORK (CNN/Money) -
U.S. stock markets gained Tuesday, with investors taking the morning's mild report on consumer prices as a hint that the Federal Reserve won't have to boost interest rates more aggressively than previously thought when it meets at the end of the month.
The Nasdaq composite (up 25.61 to 1995.60, Charts) gained 1.3 percent, the Standard & Poor's 500 (up 6.72 to 1132.01, Charts) index gained 0.6 percent, and the Dow Jones industrial average (up 45.70 to 10380.43, Charts) gained around 0.4 percent.
Stocks and bonds both jumped at the start of trading, following the release of the May CPI, a key inflation measure. Bonds managed to hold gains throughout the session, but the stock rally lost some momentum as the day wore on.
"The CPI number this morning sparked a rally in both stock and bond markets," said Timothy Ghriskey, chief investment officer at Solaris Asset Management. "But beyond the initial reaction, I think we're going to remain stuck in this range until other issues get resolved."
He says a lot of people remain worried about the transfer of power in Iraq, due to happen June 30, and the potential for terrorist attacks in the United States, not to mention disruption of oil exports.
But for the short term, the relief about inflation was enough to bring out the bulls.
Released before the open, the consumer price index (CPI) rose 0.6 percent in May after rising 0.2 percent in April, just above economists' expectations. The "core" CPI, which excludes food and energy, rose 0.2 percent in May, in line with the expectations of economists, and compared with a rise of 0.3 percent in April.
Investors, who have been obsessed lately with any hint of inflation, jumped on the CPI release as a sign that the Federal Reserve could hold off on raising interest rates aggressively.
Worries that the CPI report would be particularly strong caused a selloff on Wall Street Monday.
After the close, business software maker Oracle (ORCL: Research, Estimates) reported fiscal fourth-quarter earnings of 19 cents per share, up from 16 cents a year earlier and a penny more than expected. Revenue also rose from a year earlier and just edged analysts' estimates.
However, with the company still in the midst of a hostile takeover bid for rival PeopleSoft (PSFT: up $0.61 to $18.56, Research, Estimates), investors didn't react much to the earnings news. Shares declined modestly after hours.
Homebuilder Lennar (LEN: Research, Estimates) reported earnings of $1.22 per share, more than expected and up from a year earlier. The company also reported revenue that surpassed expectations. Shares gained just under 1 percent in after-hours trade.
Also after the close, Callaway Golf (ELY: down $0.06 to $14.94, Research, Estimates) warned that second-quarter and fiscal 2004 sales and earnings will miss expectations, due to a decline in Japanese business, and weak sales of titanium golf clubs, among other issues. Shares lost more than 21 percent in after-hours trade.
Wednesday brings reports on May housing starts and building permits around 8:30 a.m. ET, and May reads on industrial production and capacity utilization just before the opening bell, at around 9:15 a.m. ET.
CPI provides some relief
Currently, market watchers are expecting the Fed to boost the fed funds rate by a quarter-percentage point at its June 29-30 policy meeting. However, there had been some concern that the central bank would raise by a half-percentage point.
The morning CPI report seemed to cool such fears.
"I think you've got a little bit of the Goldilocks scenario with the CPI, with investors concluding that growth is strong, but not so strong that we have to worry about a 50 basis point rise at the next meeting," said John Hughes, market analyst at Shields & Co.
A lack of anything particularly earth-shattering in Tuesday comments delivered by Fed Chairman Alan Greenspan added to the soothing atmosphere.
Speaking before the Senate Banking Committee Tuesday as part of his confirmation hearing, Greenspan essentially reiterated the central bank's recent message, saying that the economy is growing solidly, but that inflationary pressures aren't a big concern right now, but if they should become a big concern, the Fed would be willing to move quickly to tighten.
Adding to the session's rise: the preliminary read on June consumer sentiment from the University of Michigan. The sentiment index rose to 95.2, from 90.2 in May, topping analysts' expectations for a rise to 90.8.
Dow component Boeing (BA: up $0.42 to $49.25, Research, Estimates) added more than 0.8 percent following news late Monday that it won a multibillion dollar contract from the U.S. Navy to design a replacement for the current fleet of submarine-hunting P-3 aircraft. Lockheed Martin (LMT: down $0.61 to $49.84, Research, Estimates) had been widely expected to win the contract. Its stock barely moved.
Among other Dow gainers, Merck (MRK: up $1.05 to $47.95, Research, Estimates) rose 2.2 percent, Microsoft (MSFT: up $0.51 to $27.41, Research, Estimates) gained 1.9 percent and Intel (INTC: up $0.44 to $28.43, Research, Estimates) gained 1.6 percent.
On the downside, component Johnson & Johnson (JNJ: down $0.80 to $56.21, Research, Estimates) fell 1.4 percent after Bear Stearns downgraded it to "peer perform" from "outperform," due to a slowdown in sales growth and increased competition.
Gateway (GTW: up $0.83 to $4.50, Research, Estimates) rallied 22.6 percent in active New York Stock Exchange trade after the personal computer maker said it would report a narrower operating loss in the second quarter than previously expected due to cost cutting and improved revenue in a few sectors.
All but one of the Nasdaq's 10 most heavily-weighted issues gained, including Intel (INTC: up $0.44 to $28.43, Research, Estimates) and eBay (EBAY: up $1.83 to $87.45, Research, Estimates).
One notable decliner on the Nasdaq was Linux provider Red Hat (RHAT: down $2.24 to $22.06, Research, Estimates), which tumbled 9.2 percent after the company's CEO said late Monday that he was resigning. The news overshadowed the company's improved second-quarter forecast.
Among other movers, Lehman Brothers (LEH: down $3.07 to $73.02, Research, Estimates) declined 4 percent even after reporting fiscal second-quarter earnings that grew from a year earlier and topped estimates, as revenue from equity underwriting and other financial deals held strong, trumping the impact of higher interest rates.
On the New York Stock Exchange, where nearly 1.34 billion shares traded, gainers outnumbered losers by more than three to one. The advance/decline ratio on the Nasdaq was more than two to one, as 1.52 billion shares changed hands.
The tame CPI report sent Treasury prices surging. The 10-year note climbed 1-15/32 points, pushing its yield down to 4.68 percent from 4.87 percent late Monday. Bond prices and yields move in opposite directions. The dollar fell versus the euro and yen.
Among commodities markets, NYMEX light sweet crude oil futures fell 46 cents to $37.42 a barrel. COMEX gold gained $4.50 to settle at $388.70 an ounce.