U.S. stocks rallied Tuesday, with the Nasdaq settling more than 2 percent higher as weaker-than-expected producer prices raised hopes that the Federal Reserve may not lift interest rates in the short term.

The Dow Jones industrial average shot up 132.39 points, or 1.19 percent, to close at 11,230.26, while the Standard & Poor's 500 Index rose 17.37 points, or 1.37 percent, to settle at 1,285.58. The Nasdaq Composite Index soared 45.97 points, or 2.22 percent, to close at 2,115.01.

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The U.S. Producer Price Index, which measures wholesale prices, rose just 0.1 percent in July, boosting interest-rate- sensitive shares, such as those of financial institutions and tech companies. Closely watched core PPI, excluding volatile food and energy prices, unexpectedly fell last month.

JPMorgan Chase & Co. (JPM) rose 2.6 percent, or $1.15, to close at $45.04 and Citigroup Inc. (C) gained 1.5 percent, or 69 cents, to settle at $48.41. They were among the top gainers in both the Dow and the S&P 500.

"As a follow-up to the exceptionally strong second-quarter earnings, the market got a strong dose of low inflation news today and the combination of the two has been well-received by the market," said David Sowerby, a portfolio manager with money management firm Loomis Sayles in Bloomfield Hills, Michigan.

Bank of America Corp. (BAC) was the S&P 500's biggest gainer, with its stock up 2 percent, or $1.02, at $52.15 on the New York Stock Exchange. The Philadelphia Keefe Bruyette & Woods index of bank stocks was up 1.66 percent on the prospect that the Fed would stay in pause mode and not raise rates again soon.

The yield on the benchmark 10-year U.S. Treasury note fell to 4.94 percent late on Tuesday from 5.00 percent late Monday, as its price rose 16/32 in a rally driven by the surprising drop in core PPI and expectations that the Fed will not increase rates in September. Bond yields and prices move inversely.

With 448 companies reporting through last Friday, second-quarter earnings forecasts for S&P 500 companies edged up in the latest week, and growth is now seen at 12.5 percent over the year-ago period, according to Reuters Estimates.

Shares of Dell Inc. (DELL) shot up 4 percent, or 84 cents, to $22.08 and helped push the Nasdaq up more than 2 percent after the world's largest personal computer maker said it does not expect a recall of notebook computer batteries will impact its business.

Dell also is set to report quarterly earnings on Thursday after the bell.

"Technology is a cyclical industry that should also be a beneficiary, should the Fed stand down for longer than two months," Sowerby added.

Shares of Qualcomm Inc. (QCOM), which are down 21.6 percent in the last three months, benefited from the run-up in tech shares and were the biggest gainer in the Nasdaq 100. Qualcomm shares climbed 5.5 percent, or $1.86, to close at $35.45.

The S&P Retail Index was up 2.2 percent as retailers' stocks climbed after Home Depot Inc. reported profits that beat estimates. Home Depot (HD) shares rose 3.6 percent, or $1.18, to $34.44 on the NYSE.

Shares of TJX Cos. Inc. rose 1.7 percent, or 45 cents, to $26.87 after the off-price retailer of apparel and home goods posted its best-ever second-quarter profit, underpinning the rise in retailers' shares.

On the downside, shares of Wal-Mart Stores Inc. (WMT) slipped 1 percent, or 45 cents, to close at $44.55 on the NYSE after the world's largest retailer reported lower quarterly profit because of a charge for selling its German stores to a rival. Still, the company maintained its profit forecast for the full year.

Volume was moderate on the NYSE, where about 1.51 billion shares changed hands, below last year's daily average of 1.61 billion. On Nasdaq, about 1.81 billion shares traded, slightly above last year's daily average of 1.80 billion.

Advancers far outnumbered decliners on the NYSE by a ratio of more than 5 to 1, while on Nasdaq, about three stocks rose for every one that fell.

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