A surprising surge in May lifted confidence in the economy. The bond market stopped its slide, easing interest rate fears somewhat
Leave it to the U.S. consumer to pull the fat out of the fire once again -- this time for financial markets. A surprising surge in retail sales in May helped spark a rally in U.S. stock indexes on Wednesday one day after equities suffered through a nasty late-session sell-off. The bond market cooperated as well, with the yield on the benchmark 10-year Treasury note retreating below the key milestone of 5.25%.
Lower bond yields temporarily dispelled fears that interest rates could move higher. The bond market proved on Wednesday that it hadn't yet broken out of the range it has maintained for the last three years, says John Merrill, chief investment officer of Tanglewood Capital Management in Houston. If it does break and stay above 5.25%, many warn higher borrowing costs could hurt housing, private equity and other segments of the economy, and lure money out of equity markets into bonds.
Despite the rise in bond yields in the last week, Merrill says stocks remain a much more attractive investment than real estate, commodities or bonds. That's because the fundamentals for stocks, such as economic and earnings growth, remain strong, he says.
That case was bolstered when U.S. retail sales surged 1.4% in May, beating Wall Street estimates of a 0.6% rise and coming off a slight decline in April. Gas station sales were up 3.8% and clothing sales rose 2.7% but the sales increase was broad-based.
Inflation data coming Thursday and Friday could support or dispel the inflation fears associated with higher bond yields higher. The May producer price index, or PPI, arrives on Thursday, and May consumer price index, or CPI, along with industrial production and capacity utilization, on Friday.
Standard & Poor's cited technical reasons for the rise in bond prices on Wednesday. Merrill says he sees little signs inflation is behind the fall in bond prices over the last week. It may be accounted for by less bond buying by China and Japan, he says.
The Federal Reserve's Beige Book, released midday on Wednesday, described a growing economy but did nothing to inflame fears of inflation or a Fed rate hike. "There was no real sign that either economic growth or price pressures are building to an extent that would prove more worrisome to" Federal Reserve policy makers, Action Economics says.
Other economic data arriving on Wednesday included U.S. import prices, which were up 0.9% in May, vs. estimates of 0.3%, after a 1.4% rise in April. Excluding oil, which was up 2.7%, import prices rose 0.5%.
On Wednesday, the Dow Jones industrial average was up 187.34 points, or 1.41%, to 13,482.35. The broader S&P 500 index, was up 22.67 points, or 1.52%, at 1,515.67.
The tech-heavy Nasdaq Composite index was up 32.54 points, or 1.28%, to 2,582.31.
In the energy markets Wednesday, July WTI crude was up 82 cents to $66.17 per barrel.
Among stocks in the news on Wednesday, the IntercontinentialExchange ICE raised its merger proposal for the Chicago Board of Trade (BOT). Based on Tuesday's closing prices, the offer is worth $211.55 per Board of Trade share. Shares closed at $201.01 on Tuesday. The ICE is in a bidding war with the Chicago Mercantile Exchange CME over the CME's crosstown rival. The ICE traded lower, but CBOT and CME moved up.
Airline stocks were down after Southwest Airlines (LUV) warned revenue isn't growing as fast as expected.
Pathmark Stores (PTMK) was flat after it reported a 16 cents per share loss for the quarter, vs. a 10 cent loss a year ago, on flat same-store sales. A proposed merger with the Great Atlantic & Pacific Co. added to expenses.
Healthspring Inc. (HS) fell after cutting its 2007 earnings guidance to a range of $1.20 to $1.35. The firm cited higher-than-expected costs.
E*Trade Financial Corp. (ETFC) was up slightly after it said total retail client assets increased 3.3% in May to a record $214.4 billion. Total daily revenue trades rose 0.2% sequentially to 171,387.
Unisys Corp. (UIS) moved lower despite winning a U.S. defense contract with a total potential value of $112 million.
Blockbuster (BBI) was up more than 8% after Citigroup analysts upgraded the stock from hold to buy. On Tuesday Blockbuster announced a new, lower-priced Blockbuster By Mail online subscription plan.
European stock markets were mostly higher on Wednesday. In London, the FTSE 100 index was up 0.6% to 6,559.60. Germany's DAX index was edged up 0.03% to 7,680.76. In Paris, the CAC 40 index finished up 0.61% at 5,934.27.
Asian markets finished mostly lower Wednesday. In Japan, the Nikkei index was off 0.16% to 17,732.77. In Hong Kong, the Hang Seng index was down 0.28% to 20.578.75. In China, the Shanghai Composite index was up 2.56% to 4,176.48.
Treasury bonds, which plunged on Tuesday, were back up on Wednesday, with yields on the 10-year note moving back below the key milestone of 5.25%. Ten-year notes were up 22/32 to 94-18/32 for a yield of 5.21%; the 2-year note was up 1/32 at 99-20/32 for a yield of 5.08%; and 30-year bonds were up 1-22/32 to 92-01/32 for a yield of 5.28%.