Bulls fight back

NEW YORK (CNNMoney) -- Stocks surged Wednesday, recovering from the previous day's pummeling, as investors welcomed strong readings on retail sales and the Fed's "Beige Book" report on the economy, and some relief on the interest-rate front as well.

The Dow Jones industrial average (up 187.34 to 13,482.35, Charts) jumped about 187 points, or 1.4 percent. The broader S&P 500 index (up 22.67 to 1,515.67, Charts) gained 1.5 percent while the tech-driven Nasdaq composite (up 32.54 to 2,582.31, Charts) climbed 1.3 percent.

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Treasury prices rose Wednesday, lowering the yield on the 10-year note to 5.20 percent from 5.29 percent late Tuesday. Treasury prices and yields move in opposite directions.

The dollar gained versus other major currencies. Oil prices jumped, gold prices fell.

Earnings reports are due Thursday morning from Bear Stearns (Charts, Fortune 500) and Goldman Sachs (Charts, Fortune 500).

Stocks rose through the session on the turnaround in bond prices and a big jump in May retail sales. However, the stock advance accelerated after the afternoon release of the Fed's "Beige Book" survey of economic activity, which showed strong growth that was not inflationary.

Overall, the session brought relief as some of the worries of the last week were absorbed and reexamined, said John Davidson, president and CEO at PartnerRe Asset Management.

"There was a concern that higher rates would slow down business and provide a drag on profits," Davidson said, referring to the recent selloff.

"But the economic news today was strong and Treasury yields backed up a bit, and I think it's making investors realize that the concern over higher rates was overdone," he said.

Stock gains were broad based, with 28 out of 30 Dow issues rising, led by Alcoa (up $1.14 to $40.48, Charts, Fortune 500), Boeing (up $1.99 to $98.47, Charts, Fortune 500), Citigroup (up $1.08 to $53.68, Charts, Fortune 500), Microsoft (up $0.54 to $30.39, Charts, Fortune 500), 3M (up $2.15 to $87.19, Charts, Fortune 500) and General Motors (up $0.67 to $32.10, Charts, Fortune 500).

Dow component Caterpillar (up $1.85 to $79.93, Charts, Fortune 500) jumped after the heavy equipment maker boosted its 2007 earnings and revenue outlook in the afternoon.

(For a look at other stock movers, click here.)

The three major gauges lost around 1 percent each on Tuesday as the benchmark 10-year note yield jumped to a five-year high, magnifying worries on Wall Street that the Fed may have to raise interest rates later this year.

Stocks had been sliding on and off for the last week on these worries. As such, the reversal in bond yields Wednesday was important for stock investors, giving the market a bit of a relief rally, said Greg Church, president at Church Capital.

However, Church said that stocks could be vulnerable to more of a pullback later this week, since investors are still in the process of factoring in the possibility of higher interest rates and what that might mean for stocks.

"It's a mixed blessing," Church said, noting that stock investors don't like higher interest rates. However, if the Fed has to raise rates because the economy is picking up, that stronger growth will ultimately help stocks.

Investors will be looking to see how a pickup in the economy might impact inflation, with readings on May producer prices and consumer prices expected over the next two day days.

In addition to the reports, Wall Streeters will be keeping an eye on how the Treasury market reacts to the reports.

Bond yields have been surging over the last weeks on bets that a stronger-than-expected economy and higher inflationary pressures mean the Fed will need to lift rates later this year.

The yield on the 10-year note - which impacts mortgage rates and other consumer loans - briefly touched 5.32 percent in electronic trading Wednesday, its highest point since 2002 and above the Fed's current target for its key short-term interest rate, 5.25 percent.

This has dragged on stock prices as higher interest rates eventually slow the flow of money through the economy, drag on corporate profits and hurt equities. In addition, the run up in bond yields has made Treasurys a more competitive place for investors to park their money.

However, the stock market was also due for a pullback, analysts said, and the declines were not unexpected. The Dow and S&P 500 had both hit record highs early last week. Between last Monday and yesterday's close, both major gauges lost less than 3 percent, a modest retreat considering the rally earlier this year.

Among other stock movers, Ford Motor (up $0.24 to $8.56, Charts, Fortune 500) continued to gain on Tuesday's news that its looking for a buyer for its money-losing Land Rover and Jaguar brands.

Blockbuster (up $0.32 to $4.27, Charts, Fortune 500) jumped 8 percent after Citigroup upgraded it to "buy" from "hold." The video chain also announced a new online rental plan that is cheaper than the one offered by rival Netflix.

Netflix (down $0.66 to $19.42, Charts) shares slipped on the news.

Lawson Software (up $0.67 to $10.00, Charts) jumped 7.2 percent in unusually active trade after the company said fourth-quarter earnings would top estimates.

A run up in energy prices gave a boost to Exxon Mobil (up $1.35 to $83.35, Charts, Fortune 500), Valero (up $1.74 to $74.66, Charts, Fortune 500), Sunoco (up $2.05 to $81.71, Charts, Fortune 500) and other oil service sector stocks.

Market breadth was positive. On the New York Stock Exchange, winners beat losers by more than 4 to 1 on volume of 1.59 billion shares. On the Nasdaq, advancers beat decliners 7 to 3 on volume of 2.15 billion shares.

U.S. light crude oil for July delivery rose $0.91 to $66.26 a barrel on the New York Mercantile Exchange, gaining after the weekly supply report showed a drop in refinery activity.

COMEX gold for August delivery fell $0.40 to settle at $652.70 an ounce.

In currency trading, the dollar gained modestly versus the euro and rallied against the yen, following the retail sales report.

The U.S. government said on Wednesday that China's yuan was undervalued and that it continues to push for it to gain, but also said that the country was not manipulating its currency to benefit its trade.