Stocks Rise, CPI Allays Rate Fears

NEW YORK (Reuters) - U.S. stocks rose on Tuesday, after a muted reading on core inflation relieved worries that the U.S. Federal Reserve would aggressively raise interest rates to ease price increases.

The technology-heavy Nasdaq rallied more than 1 percent, lifted by a jump in Oracle Corp. (NasdaqNM:ORCL - News), the world's second-largest software maker. But its shares eased after the close, even after it reported improved quarterly earnings.

Gateway Inc. (NYSE:GTW - News) shares led percentage gainers on the New York Stock Exchange (News - Websites) , after the computer maker raised its quarterly revenue view and forecast a narrower operating loss.

Before the open, the government reported that the Consumer Price Index rose 0.6 percent in May -- sharply above economists' forecast for a 0.4 percent rise. But the core CPI, which strips out food and energy and is more closely watched by the Fed for inflation trends, advanced just 0.2 percent, matching Wall Street's expectations.

The Dow Jones industrial average (^DJI - News) ended up 45.70 points, or 0.44 percent, at 10,380.43, after earlier climbing as high as 10,428.05. The broader Standard & Poor's 500 Index (CBOE:^SPX - News) rose 6.72 points, or 0.60 percent, to 1,132.01, while the Nasdaq Composite Index (NasdaqSC:^IXIC - News) advanced 25.61 points, or 1.30 percent, to 1,995.60, based on the latest data. During the afternoon, the Nasdaq had rallied to a session high of 2,006.58, putting it slightly in the plus column for the year, before it gave up some of those gains in the final hour of regular trading.

"Today is a relief rally based on an in-line consumer price index report," said Brian Bush, research director at Stephens Inc., in Little Rock, Arkansas.

"We sold off yesterday based on fears that if we got a higher CPI number, the Fed would be inclined to raise rates faster and sooner than what the market factored in. But it came in line, so you see a rally today," Bush said.

Unconfirmed rumors of explosives found at New York's John F. Kennedy International Airport and in midtown Manhattan sent stock prices lower in a late-afternoon selloff, traders said.

A terminal at JFK airport was evacuated after a suspicious package was found, but people were later allowed to re-enter the terminal.

But the market's mood was most influenced by the relatively tame core CPI data. The moderation in core consumer inflation was a big relief for financial markets, which worried that the central bank was falling behind the curve in keeping prices in check.

U.S. Treasury debt prices surged, with yields falling the most since September 2001, as the CPI report suggested the Fed might be more measured in raising interest rates than some analysts had expected. The price of the benchmark 10-year note jumped more than 1-1/2 points, pushing its yield down to 4.67 percent from 4.87 percent, its biggest drop since after the market opened following the Sept. 11, 2001 attacks.

"The market now expects this Fed to take small measured steps and not do anything drastic," said James Luke, director of growth equities at BB&T Asset Management in Raleigh, North Carolina. "The CPI gave some people comfort over the Fed's course of action. It also looks like any uncertainty surrounding Greenspan's reappointment is pretty much put to bed."

In remarks before a Senate Banking Committee hearing to recommend approval of his fifth term as Fed chief, Greenspan repeated that interest-rate rises were likely to be gradual.

Trading was active, with 1.35 billion shares changing hands on the New York Stock Exchange, compared with the 1.4 billion daily average for last year. About 1.52 billion shares were traded on Nasdaq, below last year's 1.69 billion daily average.

Investors widely expect the Fed to lift its key federal funds rate for overnight bank lending at its June 29-30 meeting by a quarter-percentage point from the current 1 percent, a 46-year low. The Fed is expected to tighten policy for the rest of this year and into 2005.

Oracle shares fell after the closing bell to $11.60 on the INET electronic brokerage from their close of $11.71 on the Nasdaq. After the close, Oracle reported higher quarterly earnings driven by improving corporate spending on technology. During the regular session, Oracle's stock had gained 16.5 cents, or 1.43 percent.

Boeing Co. (NYSE:BA - News) shares jumped, following a nearly $4 billion contract win to supply submarine-hunting aircraft to the U.S. Navy, a victory some analysts said was a surprise. Shares of Boeing, a Dow component, added 42 cents, or 0.9 percent, to $49.25.

Boeing's win of the Multi-mission Maritime Aircraft contract, one of the year's biggest defense contracts, was announced after Monday's market close. Boeing beat rival Lockheed Martin (NYSEMT - News) for the contract. Lockheed Martin shares fell 61 cents, or 1.2 percent, to $49.84.

Leading steel producers' stock prices rose, after Nucor Corp. (NYSE:NUE - News), the largest U.S. steelmaker, raised its second-quarter earnings forecast. Nucor shares jumped $2.69, or 4 percent, to $69.54, pushing the Standard & Poor's Steel Index (^GSPSTEEL - News) up 4.5 percent.

Circuit City Stores Inc. (NYSE:CC - News) shares fell, even after the retailer reported a much narrower quarterly loss on lower real estate costs and higher sales of flat-panel TVs, digital cameras and camcorders.

Shares of Circuit City, the No. 2 U.S. consumer electronics chain, fell 32 cents, or 2.5 percent, to $12.61. Though results beat analysts' estimates, Circuit City's stock fell on concern that its expenses will rise later in the year as store remodeling picks up steam.

Gateway shares leaped 22.6 percent, or 83 cents, to $4.50. The computer maker attributed its revised revenue outlook to strong demand from the business and retail sectors. (With additional reporting by Wayne Cole)