U.S. stocks scaled record highs as weak data reinforced expectations that stimulative central bank policies would continue, while evidence that Europe was stuck in recession pushed the euro to a six-week low against the dollar.
U.S. producer prices fell the most in three years and factory output fell more than forecast in April, raising bets the Federal Reserve will continue to support the U.S. economy, while an unexpectedly strong improvement in home builder confidence also helped stocks.
Some top Fed officials have raised concerns about the risk of slowing growth in domestic prices, or disinflation, snowballing into deflation that can cripple an economy like in Japan in the 1990s. The U.S. central bank's bond purchases have been intended to avert a downward price spiral along with the aim of lowering unemployment. While the United States has struggled to grow faster, data showing the euro zone economy contracted for a sixth consecutive quarter in the three months through March hurt the euro and bolstered chances that the European Central Bank might cut interest rates again later this year, analysts said.
Growing confidence that the Fed and the ECB will cling to their stimulative policies erased an early dip in U.S. stock prices and lifted European shares to fresh multi-year highs. It also fed safe-haven bids for U.S. Treasurys and German bunds, but demand for the latter tapered off with the surge in U.S. stocks.
"It's disconcerting that the data was so much lower than what we were looking for, but there's no reason for investors to sell," said Michael Binger, senior portfolio manager at Gradient Investments in Minneapolis. "The main things driving the market, the Fed, earnings, consumer confidence, are holding up, and people put money in the market on any down day. I still see a lot of value."
Still, the sluggish pace of growth in the United States and record unemployment in France and Spain highlight the limits of ultra-loose monetary policies to help struggling economies, analysts said. The bleak news on the euro zone economy spurred worries about falling energy demand and pushed Brent futures in London below $102 a barrel in early trading. But they reversed course with a rebound in equity prices.
While the euro weakened, the dollar hovered near its 4-1/2-year high against the yen and held firm against other major currencies. The dollar index touched its highest since July.
The Dow Jones industrial average ended up 60.44 points, or 0.40 percent, at 15,275.69. The Standard & Poor's 500 Index closed up 8.44 points, or 0.51 percent, at 1,658.78. The Nasdaq Composite Index finished up 9.01 points, or 0.26 percent, at 3,471.62.
The Dow and S&P 500 have each risen about 16 percent so far this year, beating the broad FTSEurofirst 300 index of top company shares which has climbed about 10 percent. The performance of those indexes, however, pales against the 45-percent advance of Tokyo's Nikkei index year to date.
"This can continue as long as the policy remains tilted towards pushing investors at the margin towards riskier assets and that is essentially what it is," said Chris Wolfe, chief investment officer for Merrill Lynch Wealth Management Private Banking and Investment Group in New York.
In addition to the Fed buying $85 billion in bonds each month, the ECB cut its policy rate to a record low of 0.50 percentage point last week, following the Bank of Japan's $1.4 trillion stimulus plan announced in April.
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