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Stocks Jump After Service-Sector Report

Published: Tuesday, 5 Aug 2008 | 11:34 AM ET

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By: CNBC.com

Stocks jumped after a report showed a better-than-expected improvement in the service sector last month.

The market had already been buoyed by falling oil prices and confidence that the Federal Reserve won't deliver any surprise surprise rate moves.

Major U.S. Indexes

.DJIA

.NCOMP

.SPX

The Institute for Supply Management reported its gauge of service-sector activity rose more than expected to 49.5 in July from 48.2 in June but remained below 50, indicating a second straight month of contraction. New orders declined but a measure of employment rose. And, on a day when the market is keenly focused on inflation, there was some relief as an index of prices paid fell by more than four points.

The service sector is a closely-watched gauge of the economy as it represents 80 percent of economic activity.

Crude oil [US@CL.1 Loading... () ] dropped more than $1, trading between $120 and $121 a barrrel, after earlier hitting a three-month low of $118 a barrel. The next stop will be $100 a barrel, according to technical analyst Nick Batsford from Hobart Capital.

The recent drop in commodities is giving stocks room to run by relieving inflationary pressure and taking some heat off the Fed, which wants to avoid slowing economic growth by pushing rates higher, Dodge Dorland, chief investment strategist at Landor Capital Management, told "Worldwide Exchange."

"Oil at the low yesterday in fact touched the 20 percent correction level," Kevin Ferry, of Cronus Futures Management, said on CNBC. "If that was a stock, people would be talking about a potential bear market in oil, so we'll see how it responds today."

The service report-oil combo created a little more action in the market than usual on a Fed meeting day.

The Fed's Open Market Committee is expected to hold its target for a interest rates to 2 percent. Investors will be watching the statement to see if the Fed offers any insight on inflation.

In earnings, Dow component Procter & Gamble [PG Loading... () ] released its quarterly report and disappointed Wall Street a bit despite beating expectations.

Procter & Gamble said price increases and cost controls offset soaring prices for oil and other commodities.

The world's largest consumer products maker's profit was $3.02 billion, or 92 cents a share, in the fiscal fourth quarter ended June 30, compared with $2.27 billion, or 67 cents a share, a year earlier. Excluding benefits from the adjustment of tax reserves, earnings were 80 cents a share in the quarter, compared to Wall Street expectations of 78 cents.

In the financial sector, Lehman Brothers [LEH Loading... () ] is mulling a sale of its investment-management division, which includes its Neuberger & Berman asset management unit as well as stakes in hedge funds and private equity funds, CNBC has learned.