Manufacturing a rally

Major gauges get a lift as ISM report hints at slower interest rate hikes.

June 1, 2005: 11:47 AM EDT
 

NEW YORK (CNN/Money) - Stocks rallied Wednesday after a report on manufacturing hinted that the economy is still expanding, but not enough to encourage more interest rate hikes.

The Dow Jones industrial average (up 113.13 to 10,580.61, Charts), Standard & Poor's 500 (up 13.87 to 1,205.37, Charts) and the Nasdaq composite (up 25.21 to 2,093.85, Charts) index all gained more than 1 percent.

Markets rallied after the closely watched ISM index, a national survey of purchasing managers that covers indicators like new orders and employment, slowed more than expected in May, with the pace of expansion being the lowest since June 2003.

The survey by the Institute of Supply Management produced an manufacturing index of 51.4 in the month, down from the 53.3 reading in April. Economists surveyed by Briefing.com had forecast a reading at 52. Any reading above 50 indicates growth in the sector.

"The ISM report was good news in two ways. There's a big difference between contraction and a slowdown; and the number still showed expansion," said Hugh Johnson, consulting investment strategist at First Albany.

"Moreover, the percentage of purchasing managers reporting paying higher prices declined sharply, showing there's was little evidence of upward pricing pressure and inflation," he said.

Slower expansion could give the Federal Reserve reason to slow the pace of interest rate hikes, something that would cheer investors. And Johnson said Wednesday's ISM report made it "no longer a certainty" that the Fed will raise the overnight lending rate at each of its next three meetings.

In other economic news, April construction spending rose 0.5 percent, below economists' forecasts. Total spending hit a record seasonally adjusted annual rate of $1.066 trillion, the Commerce Department said.

The report included a 1.3 percent jump in private nonresidential construction, the best showing since last October, and residential construction rose 0.6 percent to a record high of $595.6 billion.

Europe boosts U.S. markets
The markets continued to get some direction from Europe after French voters Sunday rejected a new European Union constitution. The decision caused the French prime minister to resign Tuesday and sent the euro to a seven-month low against the dollar early in the week.

"One of the most important factors driving bonds, clearly, and stocks, less clearly, is the expectation that the euro will fall further," said Johnson. "It is attracting capital from European market to the U.S."

The uncertainty overseas has pushed Treasury prices higher, lowering the yield on the 10-year note to 3.89 percent from 3.98 percent late Tuesday. Treasury prices and yields move in opposite directions.

In currency trading, the dollar extended gains against the euro and the yen.

Market breadth was positive, with advancers beating decliners four to one on the Dow as 509 million shares changed hands. On the Nasdaq, advancers topped decliners by two to one as 724 million shares were traded.

Techs on a tear
The tech sector paced the broad market advance, after Credit Suisse First Boston raised its target price for Google to $350, on a strong outlook for online advertising. The upgrade comes a day after Piper Jaffray raised its price target for the search engine's stock to $300.

Google (up $10.75 to $288.02, Research) shares were up nearly 4 percent in morning Nasdaq trading.

Isonics (up $0.56 to $3.66, Research) shares soared after the chip maker said it completed the first sales of its 300 millimeter silicon semiconductor wafers in May as projected.

And Nortel Networks (up $0.16 to $2.75, Research) said it expects second-quarter revenue to grow by 4 percent to 6 percent over the same period last year, matching market expansion. Shares in the telecom equipment supplier rose more than 5 percent following the announcement.

"The tech rally has been in place since April 15," said Johnson. "It raises the question of whether tech is here to stay. But what we do know is that, combined with the rally in consumer cyclicals, the tech sector shows that the economy and profits will be solid through 2006."

Bear Stearns raised its rating on cereal maker General Mills (up $1.17 to $50.67, Research) to "outperform" from "market perform;" and Kohl's (up $2.57 to $51.26, Research) shares rose after the retailer said sales at stores open at least a year rose 0.2 percent and backed its earnings outlook for the quarter.

On the other side of the ledger, defense contractor Engineered Support Systems Inc (down $4.08 to $34.92, Research) posted lower-than-expected quarterly earnings and cut its full-year outlook due to delays in a major program. 33

And luxury home builder Hovnanian Enterprises (down $0.64 to $61.46, Research) said income in the last quarter rose about 50 percent, driven by higher home prices and greater market penetration, but forecast earnings for the current quarter below analysts' estimates.

On the Dow, 27 of 30 stocks rose.

U.S. light crude for July delivery was up 98 cents to $52.95 a barrel on the New York Mercantile Exchange, a three-week high.

COMEX gold fell 80 cents to $418.10 an ounce.

In global trade, Asian-Pacific markets closed mixed Wednesday and European shares were higher at midday.