Stocks rose sharply in New York on Thursday as oil prices fell, sparking renewed confidence in a consumer spending recovery. Financial shares also rebounded from an 8% sell-off over the last two days.
Share prices had initially fallen following a report by the US Labor Department proclaiming another hefty jump in consumer prices. The 0.8% overall rise in July, although smaller than June's increase, was twice as high as expected. This in turn brought the sobering news that the Labor Department's Consumer Price Index rose at twice the rate expected in July for the fastest year-over-year inflation rate in 17. The jump was blamed on costlier energy and food prices.
The core index, which eliminates food and energy prices, did not jump up to the same level, but it still rose slightly above forecast for last month - by 0.3%
Although potential inflation remains a reality, it was not until a drop in oil that concerned stock traders were reassured that rising oil and gas prices would force consumers to continue curtailing their spending. Consequently the market rebounded quickly, perhaps a result of investors reminding themselves that current data reflected conditions last month when oil prices were approaching $150 a barrel.
The most notable standouts from the floor were the shares of Bank of America Corp, the No. 2 US bank, who gave the biggest boost to the S&P 500, and led the Dow's financial constituents with a gain of 4.1% rising to $30.05.
Also, JPMorgan Chase was up nearly 3%, two days after the No. 3 US bank roiled investors with news that it had taken $1.5 billion of further write-downs in the current quarter as it attempts to grapple with the fallout from the housing slump.
The stocks of banks and home builders rose sharply on positive remarks about the housing market, by former Federal Reserve Chairman Alan Greenspan. Also, on the back of some rare good news for mortgage finance giants Fannie Mae and Freddie Mac that the companies could be allowed in the main market for mortgage bonds, both companies jumped 7% .
Retailers such as Wal-Mart Stores also benefited from oil's fall. "The fact that financials are on the mend is part of what's giving the market buoyancy today," said Peter Kenny, Managing Director at Knight Equity Markets in Jersey City, New Jersey.
"The only hope that this market has is that with the commodity prices having come down fairly substantially over the last month or so, that trend will continue. If it continues, it will go a long way in helping the Fed not have to raise rates," he added.
