Stocks Advance on Hopes for Economic Rebound

Even though the economy remains weak, investors on Thursday were already looking ahead to a recovery and setting their sights on inflation.

Prices of energy, metals and other commodities rose Thursday and helped lift stock markets higher.

Crude oil prices rose to their highest point in seven months, gold flirted with $1,000 an ounce, and interest rates on government bonds increased sharply.

Investors seeking signs of economic stability were also encouraged by reports on Thursday showing reductions in first-time unemployment claims and continuing jobless claims for last week.

The numbers underscored hopes that the worst declines in the labor market were ebbing as investors prepared for the monthly unemployment report on Friday.

As investors see more signs that the global recession is beginning to flatten, they are moving money into stock markets and riskier corporate bonds, and away from safer investments, including longer-term Treasury notes.

Investors are growing concerned that the government's huge spending projects could lead to a round of inflation once the economy begins to recover, driving commodity prices higher and pulling Treasury prices even lower. Some analysts worry such a move could stifle consumer spending and throw the economy into deeper trouble.

"All the actions the Treasury has taken to drag us out of the muck are going to come back to bite us," said James D. King, president of National Penn Investors Trust.

On Thursday, crude oil futures for July rose $2.69 to $68.81 a barrel after Goldman Sachs said that oil prices could surge to $85 a barrel by the end of the year. Just a few months ago, some oil analysts were predicting that oil could sink to $20 a barrel as the economy stayed mired in recession.

John Kilduff, senior vice president of energy at MF Global, said he was seeing a new species in the markets to complement the so-called bond vigilantes who drove up bond yields decades ago in protest of the government's monetary and fiscal policies. Enter the commodity vigilantes, he said.

"There's a new crew of commodity market vigilantes out there as well, buying up hard assets in anticipation of how beaten up the dollar could get as a result of these moves by the Fed and Treasury," Mr. Kilduff said. "There's a real concern out there."

The prices of copper, wheat, sugar, silver and platinum also rose on Thursday, and gold rose to $980 an ounce. Even though those commodities and others have rebounded sharply this spring, analysts said that global demand for raw materials has remained depressed, and they did not expect a speedy recovery would revive industrial output soon.

"It's unnerving," Mr. Kilduff said. "You have a hard time squaring the fundamental picture of supply and demand with these price rises."

The Dow Jones industrial average gained 74.96 points, or 0.9 percent, to close at 8,750.24 while the broader Standard & Poor's 500-stock index rose 10.7 points, or 1.2 percent, to 942.46. The Nasdaq was 1.3 percent higher, closing at 1,850.02.

Financial stocks led the way higher after analysts upgraded several banks, encouraging investors to put their money back into a section of the market that fell the hardest as the financial crisis took hold. Goldman Sachs rose 5.2 percent to $149.47 after an analyst upgraded its stock. Bank of America and Citigroup each gained more than 5 percent.

Retailers were mixed after another anemic month of sales in May, and energy producers like Exxon Mobil and Chevron rose on higher oil prices.

But investors shunned longer-term Treasury notes for another day, pushing the price of the benchmark 10-year note down 1 12/32 to 95 5/32. The yield rose to 3.71 percent, from 3.54 percent late Wednesday.

The rising yields on Treasuries are rippling through to mortgage markets. On Thursday, Freddie Mac said the rate on a 30-year fixed mortgage rose to an average 5.29 percent this week, from 4.9 percent. The Federal Reserve is buying billions in securities to contain borrowing costs, but analysts said the steady rise in rates suggested that bond investors were undoing those efforts.

"It would be a detriment to early recovery if rates do trend higher," said Art Hogan, chief market analyst at Jefferies & Company.