Rising bond yields have pressured equities in recent weeks, as they offer a risk-free alternative to stocks, while lifting borrowing costs for consumers and businesses. But yields have stabilized over the past two sessions amid signs that U.S. inflation may not be as high as feared.
Friday's consumer price index for May was the last near-term hurdle for investors, and its core reading, which excludes food and energy and is monitored by the Federal Reserve, checked in below Wall Street expectations.
The Dow Jones Industrial Average gained 85 points to 13,639. It earlier rose to an intraday high of 13,688, just 4 points away from its record high of 13,692, hit on June 1.
For the week, the blue-chip average gained 1.6%.
Out of the Dow's 30 components, 25 advanced on Friday, led by the likes of Walt Disney Co. , Merck & Co. Inc. , General Motors Corp. , and Dupont .
Leading the gains among blue chips, Intel Corp. gained 4.3%. The stock was upgraded to buy from neutral at Goldman Sachs, which said Intel rival Advanced Micro Devices Inc.'s likely move to an outsourced business model will create significant benefits for Intel.
Home Depot rose 0.4%. The home-improvement retailer has reportedly received two separate $10 billion offers for its supply unit.
The S&P 500 index finished up 9.9 points to end at 1,532. The Nasdaq Composite rose 27 points to close at 2,626, after earlier touching 2,630, a level unseen since February 2001.
For the week, the S&P gained 1.6% and the Nasdaq rallied 2%.
"People are happy that core inflation came in better than expected," said Peter Cardillo, chief market economist at Avalon Partners. "It seems that the hike in food and energy prices was offset by the deterioration in the housing market."
However, Cardillo said that the expiration of options on Friday could lead to volatility.
Trading volumes showed 2.0 billion shares exchanging hands on the New York Stock Exchange and 2.4 billion trading on the Nasdaq stock market. Advancing issues topped decliners by 26 to 9 on the NYSE and by 2 to 1.
By sector, semiconductors , Internet shares , biotechnology , oil , and gold .
U.S. inflation hurdle cleared
Stock futures rallied after the Labor Department's released its May consumer price index.
While the headline CPI was boosted by higher energy prices, rising 0.7% for its largest increase since Hurricane Katrina and the second largest in 16 years, investors focused on the core rate of inflation.
The core CPI, which excludes food and energy costs, rose just 0.1%. The 0.7% gain on the headline CPI was just as expected by economists. But the 0.1% increase was less than the 0.2% anticipated by economists surveyed by MarketWatch.
The data helped boost bonds, which lose value when inflation rises. The benchmark 10-year Treasury bond gained 14/32 to close at 94 28/32, while its yield , which moves inversely, fell to 5.17%.
"The year-on-year rate is now down to just 2.2%, well off the 2.9% peak recorded in September, and raising the question of just how long the Fed can credibly continue to argue that there is upside inflation risk," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.
Stocks rallied on Wednesday and Thursday, after similar signs of contained inflationary pressures. On Thursday, news that May producer prices were higher than expected also failed to revive inflation fears.
This week's inflation reports have provided Wall Street with some "near-term relief", Joe Battipaglia, investment strategist at Ryan, Beck and Comany, tells MarketWatch.
"Investors still have the risk of data change and wrinkles in the economy," Battipaglia said, predicting that this will lead to "more volatility" this summer.
Crude oil futures continued to advance, rising 35 cents to close at $68 a barrel, marking a 5% gain for the week. Gasoline prices, meanwhile, climbed near a three-week highs. Concerns over U.S. refinery capacity continue to push energy prices higher. Violence in the Palestinian territories also fueled oil prices.
Gold futures were higher as the dollar fell. The August futures contract gained $2.80 to close at $658.70 an ounce. For the week, gold gained 1.3%.
The dollar fell against the euro after the CPI, which reduced expectations that the Federal Reserve might hike interest rates. But the dollar rose against the yen after the Bank of Japan overnight left rates unchanged.
Stocks on the move
A press report said that Nymex Holdings , which owns the New York Mercantile Exchange, is exploring a sale to NYSE Euronext , Deutsche Boerse Ag., or Chicago Mercantile Exchange Holdings .
CME, however, said late Friday it's not in discussions with Nymex.
Babcock & Brown is leading an investment group that agreed to buy Coinmach Service Corp. for $1.33 billion, including Coinmach's debt. The investors are paying $13.55 per Class A share, a 15.7% premium to Thursday's close.
Dow Jones & Co. gained 1.9%. A report in the Wall Street Journal said that Pearson Plc. is seeking partners to bid for Dow Jones. Rupert Murdoch's News Corp. has bid $5 billion for Dow Jones, which is the publisher of both the Wall Street Journal and of Marketwatch.
The Federal Trade Commission is expanding its probe into proposed mergers in the internet advertising space. The agency will review Microsoft Corp.'s proposed $6 billion acquisition of aQuantive .
By Nick Godt