Stocks rally as tame CPI calms inflation fear

By Jennifer Coogan

NEW YORK (Reuters) - Stocks closed higher on Friday, helped by a government report that showed underlying price pressures rose moderately in May, easing fears that inflation would force a near-term rise in interest rates.

Shares of Lehman Brothers Holdings Inc LEH.N jumped almost 14 percent, snapping a five-day losing streak as some short-sellers unwound their positions before the weekend. Lehman's rebound drove other broker shares sharply higher.

Microsoft Corp (MSFT.O) was another big contributor to the gains in both the Nasdaq and the S&P 500, advancing almost 3 percent, after it ended talks to buy Yahoo Inc (YHOO.O), bringing relief to investors who saw the bid as a risky move.

Despite relentless gains in oil and food prices recently, investors bet the latest inflation statistics would not force the Fed to hike rates dramatically, helping the economy recover and improving the outlook for corporate profits.

"There was concern earlier in the week that CPI would be out of range, but it came in within expectations and that was a relief. We saw the market respond favorably," said Bucky Hellwig, senior vice president at Morgan Asset Management, in Birmingham, Alabama.

The Dow Jones industrial average .DJI was up 165.77 points, or 1.37 percent, at 12,307.35. The Standard & Poor's 500 Index .SPX was up 20.16 points, or 1.50 percent, at 1,360.03. The Nasdaq Composite Index .IXIC was up 50.15 points, or 2.09 percent, at 2,454.50.

The S&P ended little changed for the week, while the Dow gained 0.8 percent and the Nasdaq fell 0.8 percent. At the closing bell, the S&P was down just 0.1 percent for the week.

Technology shares rose after being beaten down in recent days on fears of rate increases and weaker overseas sales.

Microsoft shares rose 2.9 percent to $29.07 on the Nasdaq.

On Thursday, Microsoft ended talks to buy Yahoo Inc (YHOO.O) -- a relief to investors who thought the bid was a risky move. Yahoo, however, agreed to an ad partnership with Microsoft's rival Google Inc (GOOG.O).

Shares of Google gained 3.4 percent to $571.51 on the Nasdaq. Analysts at Sanford C. Bernstein lifted their price target on both Yahoo and Google shares.

Yahoo shares spent most of the session down more than 4 percent, but ended just 0.2 percent lower at $23.47 after investors suing the company's board made renewed calls for a swift trial in the case.

U.S. crude oil for July delivery settled at $134.86 a barrel, down $1.88, which added to the market's positive tone.

Lehman Brothers, which shook up its management ranks on Thursday as it replaced its chief financial officer and its chief operating officer, rose $3.11 to $25.81 on the New York Stock Exchange. Analysts said some investors who took short positions, betting on a fall in Lehman's stock, were probably closing out their positions after the stock's recent slide.

An S&P index of financial shares .GSPF gained 2.1 percent.