Stocks Higher as Corporate Deals, GDP Data Calm Interest Rate Worries

Wall Street showed signs of life Thursday, closing sharply higher after a drop in existing home sales and sturdy economic growth calmed investors' inflation jitters and motivated them to buy stocks following a two-week decline.

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At the close, the Dow Jones industrial average gained 93.73, or 0.84 percent, to 11,211.05. The Dow is 3.8 percent off its six-year closing high of 11,642.65, reached May 10.

While first-quarter gross domestic product growth was revised upward to an annual rate of 5.3 percent, that figure came in below forecasts for a 5.8 percent gain. The adjustment came as evidence that the economy is expanding but at a controlled pace, which could keep the Federal Reserve from lifting short-term lending rates.

The GDP's inflation component was unchanged at a 3.3 percent increase, further easing anxiety over escalating prices. Meanwhile, decreased sales of existing homes stirred Wall Street's hopes that a cooling housing market will limit the pace of economic growth.

Michael Gregory, a senior economist at BMO Nesbitt Burns, said a gradual pullback in median home prices should weaken consumer spending as home equity values fall, an upbeat sign for investors uncertain about whether the Fed has hiked interest rates enough to thwart demand and contain inflation.

"The big question now is will (the economic slowdown) happen fast enough to stop the Fed from raising rates in June," Gregory said. "Probably not, but it could point to an August pause. Inflation tends to creep up after the economy has turned — we have to see how that unfolds."

Stocks built on a modest advance from the prior session, when the major indexes fluctuated wildly before a late rally pushed them into positive territory. But the recent erratic trading showed investors were still nervous about the economy's health and have been unwilling to take bets.

Broader stock indicators were sharply higher. The Standard & Poor's 500 index added 14.31, or 1.14 percent, to 1,272.88, and the Nasdaq composite index jumped 29.07, or 1.34 percent, to 2,198.24.

Advancing issues led decliners by 4 to 1 on the New York Stock Exchange, where volume of 1.74 billion shares trailed the 2.27 billion shares that changed hands Wednesday.

Bonds fell late in the session, with the yield on the 10-year Treasury note rising to 5.07 percent from 5.04 percent late Wednesday. The U.S. dollar plunged against the Japanese yen, while gold prices returned to $650 an ounce.

Stocks were recovering from a two-week dropoff that sent the Dow falling almost 5 percent and put the Nasdaq in the red for 2006, spurred by indications from the Fed that high energy prices remain a problem for inflation and could require higher interest rates.

With the Fed saying future increases will depend on the economy's health, investors have become overly sensitive to economic news and any hint that inflationary pressures are building. After the latest inflation scare pulled down stocks from multiyear highs, traders still seemed to be looking for more reassurance before putting money back into the market; Friday's personal spending report could be another catalyst for buying.

"It's certainly good to see the market move higher today," said Michael Sheldon, chief market strategist for Spencer Clarke LLC. "Given the oversold nature of many of the major indices, I think further gains are likely over the next several trading sessions."

The Commerce Department revised first-quarter GDP growth from an advance reading of 4.8 percent last month. Elsewhere, the Labor Department said first-time unemployment claims dropped by 40,000 to 329,000 last week, a smaller decline than estimates of 51,000.

The National Association of Realtors said April sales slid 2.3 percent to 6.76 million, as the rise in median price tailed off to 4.2 percent from 7.4 percent the month before.

Crude futures surged as the market fretted about the upcoming summer driving and hurricane seasons, even after a weekly update showed gasoline reserves were growing. A barrel of light crude added $1.46 to settle at $71.32 on the New York Mercantile Exchange.

Regions Financial Corp. is acquiring AmSouth Bancorp. in a $9.8 billion stock swap that would create one of the nation's biggest bank holding companies. Regions tumbled $1.09 to $34.44, and AmSouth dropped 90 cents to $28.

Wal-Mart Stores Inc. (WMT) jumped $1.42 to $49.45, helping to lift the Dow industrials after Banc of America upgraded the retailer to "buy" on early indications of success with its plan to slow square footage growth and improve gross margins.

Yahoo Inc. (YHOO) and eBay Inc. (EBAY) announced an advertising and communications alliance in a joint effort to compete with other technology powerhouses like Google (GOOG) Inc. and Microsoft Corp. (MSFT) Yahoo added $1.13 to $32.92, and eBay rose $3.68 to $33.88.

MasterCard Corp. soared in its trading debut after pricing its initial public offering at $39 apiece — below a range of $40 to $43 — to generate about $2.39 billion in proceeds. MasterCard jumped $7 to $46.

The Russell 2000 index of smaller companies added 14.31, or 2.01 percent, to 725.58.

Overseas, Japan's Nikkei stock average sank 1.34 percent. Britain's FTSE 100 gained 1.62 percent, Germany's DAX index surged 2.13 percent and France's CAC-40 was higher by 1.63 percent.

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