New signs that inflation may be in check lifted stocks again Friday, with markets closing the week on an upbeat note ahead of Tuesday’s Federal Reserve interest rate policy meeting.
An early rally lifted the Dow Jones industrial average more than 100 points before it lost ground in the afternoon to close up 63.40, at 10,609.37. Trading was light at 859 million shares. For the week, the index rose 31.51 points.
After enduring a pair of sharp drops earlier in the week, the technology-heavy Nasdaq composite index continued to recover: It also posted an early advance of more than 100 points before sliding back to finish with a gain of 29.48, to 3529.06. For the week, though, it lost 287.76 points, or 7.5 percent.
Financial and technology stocks led the market higher, while new economic data further eased investors’ concerns about inflation ahead of next week’s key Fed meeting.
Wholesale prices fell sharply in April, giving traders reason to believe the Fed, which has raised rates five times since June, may boost rates just once more next week and then stop the increases for awhile.
Early in the day, the Labor Department said its producer price index dropped 0.3 percent last month, the sharpest drop since February 1999. The core rate, excluding often volatile food and energy prices, rose a mild 0.1 percent. A day earlier, the government’s retail sales report also showed softening numbers.
“The market was braced for a worst case scenario,” Jack Bouroudjian, senior vice president for Commerz Futures, said Friday from the floor of the Chicago Mercantile Exchange, but Friday’s data “make Tuesday a lot more interesting.”
Even if the Fed does boost interest rates by a half-percentage point, as most observers expect, traders are beginning to think signs of a slowing economy will persuade the Fed to leave rates alone after this month, he said.
That may help entice some traders back into the market: The Nasdaq market had its slowest week of trading in a year.
“The last couple of days we’ve had some rebounding, though on unconvincing volume,” said Phil Dow, director of equity strategy for Dain Rauscher Wessells in Minneapolis. “My guess is the market won’t do much more until we see what [Fed Chairman Alan] Greenspan is going to do.”
Stocks were down early in the week as investors’ fears grew that interest rates will keep climbing.
“No matter how good the earnings news was, stocks were still down. With the important price data [Friday], I think the market was saying that those fears might be overdone,” said John Ryding, chief economist for Bear, Stearns & Co. in New York. “Everyone still expects a half-point [interest rate boost] on Tuesday, but the key will be the language the Fed uses.”
The Labor Department reports consumer price figures Tuesday before the Fed announcement. If that number shows more of a slowdown and the Fed’s comments out of its policy meeting are benign, investors should see a strong week in the markets, Ryding said.
“If there’s a bad CPI report and a tightening bias in the comments, then we’ll see the market give back some of these gains,” he said.
Financial stocks performed well, which traders attributed to the decreasing worries about interest rate increases.
Citigroup, J.P. Morgan and American Express, along with General Motors, led the Dow gainers. Minnesota Mining and Manufacturing was the Dow’s biggest loser, down $1.06, to $84.87.
Dell Computer led the Nasdaq most-active list, climbing $5.19, to $49.87, after posting better-than-expected quarterly results late Thursday.
The Russell 2000 index of small-company stocks rose 1.55, to 490.94.
Winning stocks held a slight lead over losers on the NYSE and Nasdaq markets.
Investors cheered when Ingersoll-Rand agreed to pay $29 a share to buy St. Louis-based refrigeration equipment-maker Hussman International. Hussman shares more than doubled, to $28.56, on news of the $1.56 billion deal.
Schaumburg-based Motorola continued its recovery from a drubbing earlier in the week, gaining $3.50, to $95.69.
