Stocks closed higher on strong economic data, but gains were limited because of uncertainty whether the Federal Reserve will cut interest rates.
"Today the data was great -- the ISM, retailer sales -- but tomorrow it might not be," said Stephen Porpora, managing floor broker at William O'Neil. "We have the employment report -- the mother of all reports -- and all the Fed governors are weighing in. We're watching the data and that's also what the market is doing. But technically, these markets are looking pretty good."
The major indexes pared earlier gains after St. Louis Federal Reserve President William Poole said that the Fed's policy actions were intended to shield the U.S. economy from any financial market crises rather than bail out markets.
"I think people are starting to listen to Poole's statements and I would infer that he is not in favor of a rate cut," said Schrader. "The general consensus is that they are going to cut (rates), but Wall Street needs to be careful what they wish for because if they cut it will mean things are a lot worse than people think."
"We moved higher earlier in the day on the better economic numbers," said Tom Schrader, managing director of listed trading at Stifel Nicolaus. "The ISM was better, labor costs were good from an inflation standpoint and got things moving in the right direction."
"Not only do I think they won't (lower rates), but I don't think they should," says Brian Wesbury, chief economist at First Trust Investors. "Chairman Bernanke really has a chance to solidify his credibility and his independence. There's nothing interest rate cuts can do to save the problems that are plaguing markets today."
On Thursday morning, the Labor Department reported a 19,000 decline in first-time filings for unemployment benefits last week, setting the stage for the much anticipated monthly jobless data set for release Friday morning. Economists are expecting a rise of 113,000 in August non-farm payrolls.
The 's non-manufacturing index,which measures services growth was unchanged in August at 55.8. Any reading above 50 indicates growth. A separate government report showed an uptick in worker productivity in the 2nd quarter to an annualized gain of 2.6%.
Along with many other retailers, Wal-Mart Stores surprised to the upside with an August same-store sales gain of 3.1%, excluding sales of fuel, from a year ago. The sales gain was led by strong back-to-school gains. Analysts expected a gain of less than 2%.
"This is absolute proof the consumer is not dead," says Larry Smith, chief investment officer of Third Wave Global Investors. "As long as the unemployment rate is where it is, as long as jobs and wages are growing, the consumer is going to be fine –- not as strong as they were two years ago, but they will be fine."
Lurking in the background, however, were worries of a global credit crunch.
The U.S. commercial paper market shrank for a fourth week, according to Federal Reserve data. The amount of outstanding commercial paper tumbled $54.1 billion in the latest week for a 4-week total contraction of $300 bln. This leaves total outstanding commercial paper at $1.925 trillion -- levels not seen since March -- indicating the credit market remains tight.
In corporate news, shares of Apple fell after the company said it will give those who bought the iPhone before yesterday's price cut $100 in store credit.
Campbell Soup posted quarterly profit below analysts' estimates despite strong sales of its V8 vegetable juice, as the company overhauled its supply chain in Australia and Indonesia.
Countrywide Financial , the largest U.S. mortgage lender, said late Wednesday it would cut 900 jobs across the country, primarily in its mortgage production divisions. The move follows a previous round of layoffs last month.
Seagate Technology introduced new computer back-up systems designed to hold vast amounts of consumer-generated data such as videos, photos, music and games.
The European Central Bank resorted to making an emergency injection of 42-billion euros ($57.4 billion) into European money markets amid a continued rise in The London interbank offered rate, or LIBOR, which has been rising as banks in Europe curtail lending to conserve cash.
The three month LIBOR fixing for sterling deposits rose another 8 basis points to 6.80% which is more than 1 point above the Bank of England's 5.75% bank rate. That's the widest spread in two decades.