U.S. Stocks Rally After Inflation Report

NEW YORK (MarketWatch) -- U.S. stocks rallied Tuesday, after weaker-than-expected consumer price inflation in April boosted hopes that the Federal Reserve will be able to cut interest rates to boost a slowing economy, offsetting disappointing results from Home Depot Inc. and Wal-Mart Stores weighed on sentiment.

"The [inflation] data was really positive and it turned us off of the concerns over Wal-Mart and Home Depot," said Kevin Kruszenski, head of trading at KeyBanc Capital. "There's also a thesis that there's now this shortage of stocks with all the corporate buy-backs and the private buyouts we're seeing."

The Dow Jones Industrial Average was up 90 points at 13,436, just off an earlier high of 13,452. The Dow was lifted by shares of General Motors Corp , American Express Co. and JP Morgan Chase .

Home Depot also recovered from early selling pressure. It was down only 0.3% after falling nearly 3%. The home improvement retailer posted a 30% first-quarter profit decline that came below expectations and said annual earnings would be at the low end of guidance. Home Depot blamed a challenging housing market and erratic weather.

Wal-Mart Stores also recovered from early weakness and recently traded flat. The retail giant's first-quarter earnings met lowered forecasts but its second-quarter outlook came at the lower end of Wall Street expectations.

Meanwhile, deal news and other strategic corporate news continued to feed investor appetite on Tuesday.

Ingersoll Rand Co. surged 6.3% and was among the most actively traded stocks on the New York Stock Exchange. The company said it is exploring the sale of spin-off of its Bobcat and construction-related businesses. Its board also doubled the manufacturing company's share repurchase program to $4 billion from $2 billion.

The broad S&P 500 index gained 9.0 points to 1,512, while the Nasdaq Composite reversed early weakness. The tech-heavy index was up 11 points at 2,557.

Trading volumes showed 396 million shares exchanging hands on the NYSE and 563 million on the Nasdaq stock market. Advancing issues topped decliners by 19 to 9 on the NYSE and by 15 to 11 on the Nasdaq.

Agilent Technologies jumped 7% after its current quarter earnings per share and revenue outlook topped analyst estimates.

Yahoo! Inc. fell 0.2% after after it announced that Blake Jorgensen, a founder of Thomas Weisel Partners, will become the company's chief financial officer on June 4.

Inflation

Stock futures reversed early weakness after news that the consumer price index rose 0.4% in April, below the 0.5% expected by Wall Street economists.

Excluding food and energy prices, the so-called core CPI rose 0.2%, in line with expectations, and cutting the annual gain in the core down to a one-year low of 2.3%.

"The market is relieved that the core rate of inflation hasn't edged up," said Avalon's Cardillo. "It's bringing us closer to where the Fed would like the core rate to be. The next thing the market will want to know is that a Fed cut is coming."

Meanwhile, news that conditions for New York area manufacturers improved slightly in May, in line with expectations, had little immediate impact on trade.

Other markets

The dollar fell slightly against major rivals after the CPI data.

Treasury bonds advanced, with the benchmark 10-year Treasury bond up 5/32 at 98 19/32 in price, while its yield, which moves inversely, fell to 4.680%.

Oil futures were down 10 cents at $62.36 a barrel. Traders weighed worries about tight U.S. gasoline inventories ahead of tomorrow's data releases, along with concerns over oil supply disruptions in Nigeria.

Gold futures rose $1.70 to $671.80 an ounce.

More deal news

The market continued to be fed with more deal news on Tuesday.

On Monday, the Dow industrials gained while the rest of the market struggled. News that DailerChrysler AG agreed to sell 80% of Chrysler to a private equity firm had helped buoy the auto sector, including rivals General Motors Corp. and Ford Motor Co. .

On Tuesday, Reuters backed a $17.2 billion offer from Thomson Corp. that valued the financial news and data provider at $82.23 per share. Importantly, a foundation designed to preserve Reuters news integrity which holds blocking power opted to back the deal as well.

American International Group agreed to pay $813 million, or $22 a share, for the roughly 40% it doesn't already own in 21st Century Insurance Group .

Germany's HeidelbergCement agreed to buy Britain's Hanson in a $15.8 billion deal in the building materials business.

Beckman Coulter won't lift its $90-a-share bid for Biosite , which has backed a $92.50 a share offer from Inverness Medical . Biosite closed at $94.66, indicating some in the market expected Beckman to top Inverness' bid.


By Nick Godt