A Labor Department report showing wholesale prices rose less than expected in July spurs a rally in leading markets.
Stocks soared Friday as a new government report suggested inflation remains in check, raising hopes that the Federal Reserve need not be aggressive in raising interest rates to cool off the economy.
The Dow Jones Industrial Average rose 184.26 points to close at 10,973.65, a gain of 1.7 percent. For the week, the blue-chip index gained 259.62 points. Broader stock indicators were also sharply higher. The Standard & Poor's 500 rose 29.52 to 1,327.68, and the Nasdaq composite index rose 88.32 to 2,637.81.
Stocks rose after the Labor Department reported a modest rise in the Producer Price Index, a measure of inflation pressure before it reaches the consumer. Prices at the wholesale level rose a less-than-expected 0.2 percent in July, the Labor Department said. Yields on the new 30-year Treasury bonds auctioned Thursday fell to 6.10 percent from 6.19 percent before the figures were released.
"That was the trigger for the rally," said Ricky Harrington, technical analyst at Wachovia Securities in Charlotte, N.C. "The market had a very understandable, predictable reaction to good news."
Investors have been nervous for weeks about the likelihood that Fed policymakers will raise interest rates a second time this summer when they meet Aug. 24. There also are fears of a third rate increase this fall if the economy shows signs of overheating.
The small advance in wholesale prices reported Friday, if matched at the consumer level, could ease concerns somewhat at the Fed about a potential breakout of inflation.
"We will hold to the view that the Fed will tighten," said Michael Moran, chief economist at Daiwa Securities America Inc. But he said various components of the survey indicated that inflation may never make its way to U.S. consumers, and should mollify the Fed.
The brighter outlook on interest rates powered a strong rally, especially in the technology and financial services sectors.
Leading the Dow industrials were American Express and J.P. Morgan. Recently battered Internet stocks also gained, with search engine Yahoo! and online auction firm eBay rising on Nasdaq. America Online gained on the New York Stock Exchange.
Those companies have faltered in recent weeks under the threat of higher rates. Investors buy those shares on the promise of strong future growth, and higher rates reduce the value of future earnings.
Harrington said Wall Street will remain intensely focused on any possible signs of inflation in the days leading up to the Fed's next meeting. Next week, the government will release its Consumer Price Index, another barometer of inflationary pressures. Bad news, he said, could stop the market's run.
"The market is very sensitive to all this data," he said. "Market psychology can change in a minute."