TAKE A LOOK: Reaction to factory data

NEW YORK (Reuters) - U.S. factory activity expanded unexpectedly in June but inflation pressures soared, according to a report released on Tuesday.

U.S. construction spending fell 0.4 percent in May on continued deterioration in the residential sector, but outside of home building private spending rose for the fifth consecutive month, government data on Tuesday showed.

KEY POINTS: * The Institute for Supply Management said its index of national factory activity rose in June to 50.2 from 49.6 in May after four straight months of contraction. * Economists' median forecast was for a result of 48.6, according to a Reuters poll. The 81 forecasts in the survey ranged from 46.0 to 50.5. * A reading below 50 represents contraction in the factory sector. June's reading was the first above 50 since January. * The index of prices paid jumped to 91.5 from 87.0 in May, for the highest reading since 1979.

COMMENTS:

MARC PADO, U.S. MARKET STRATEGIST, CANTOR FITZGERALD & CO., SAN

FRANCISCO:

"When you talk about GDP, we had a huge drawdown in inventories in the fourth quarter, and a small drawdown in the first quarter. We start looking at a rebuild of inventories, which is going to be a positive for GDP. That's where a number like this comes into play; it also plays well for the jobs number.

"We basically waited for the ISM to get out of the way, to make sure there wasn't going to be some really nasty number that was going to disrupt us. So we once we got that out the way, that's when the market took off.

"So it wasn't so much the ISM number, it was the fact that the bargain hunters were just waiting for that number to come out so they could get to work and look for some opportunities here."

GEORGE ADELL, FIXED INCOME STRATEGIST, COMMERCE CAPITAL

MARKETS, JUPITER, FLORIDA:

"It's negative for bonds and pro stocks. It paints a slowing growth scenario with rising inflation. That's a tough path for the Fed to traverse.

"Prices are downright ugly. We've seen an awful lot of inflation in the past year."

"There is growth in manufacturing. Aircraft and machinery are going overseas where demand is still solid."

"What we've seen from the Fed is a lot jawboning. There market has lifted rates a bit for them. They are setting up for higher rates down the road, probably later this year."

RICHARD SPARKS, SENIOR EQUITIES ANALYST, SCHAEFFER'S INVESTMENT

RESEARCH, CINCINNATI:

"I think the simple headline that it was above 50 was enough to spur a little bit of buying in the market, I'm not sure it's going to be able to hold, but it was generally regarded as positive. I don't think it's going to be a large help for the market. I think the overriding concern on oil prices and the tensions in the Middle East are going to be bigger worries. I don't think these numbers will be enough to overcome that."

STEVEN WIETING, ECONOMIST, CITIGROUP, NEW YORK:

"This is a pretty slack period for manufacturing activity. Retail spending has been moderating but is still positive. I think we could expect softer readings toward the end of the year, post-tax stimulus."

PIERRE ELLIS, SENIOR ECONOMIST, DECISION ECONOMICS, NEW YORK:

"It's modestly stronger than expected but it's a very middling report because the big boost, as in the Chicago purchasing managers survey, came from a slowdown in deliveries rather than firmness in orders or production. In Chicago, the delivery slowdown probably had to do with the flooding in the Midwest and there may be some of that in this, too, but the big message is that generally speaking manufacturing is holding together, even in the relatively weak components of the survey. That's consistent with the idea that the economy is in a rough patch, but so far not in a serious decline. We're getting subtle moves in an index that typically is watched for sharp movements that indicate turning points. So far, there is no turning point, which is good news for a while, but eventually will become bad news if there's no improvement."

BORIS SCHLOSSBERG, SENIOR CURRENCY STRATEGIST, DAILYFX.COM, NEW

YORK:

"That should firm up the dollar a bit because one thing that's been going on over the last few days is the market is growing doubtful about the possibility of Fed rate hikes for the rest of the year. But if inflationary pressures are so persistent, futures markets won't have a choice and will have to start pricing in more hikes. But this is all pre-positioning ahead of the payrolls data. If we see employment in dire straits and core job losses going forward, the Fed will find itself in the worst possible position -- between high inflation rates and slow growth. It will be like a deer frozen in headlights."

JOE MANIMBO, CURRENCY TRADER, RUESCH INTERNATIONAL,

WASHINGTON:

"The dollar is likely to receive a modest boost from this morning's encouraging data. The ISM index climbed back into growth territory, and should ease some of the concerns about the outlook for the U.S. economy that had pressured the dollar overnight, while construction spending, while still gloomy, fell less than expected and the prior month posted a slight upward revision."

MARKET REACTION: * BONDS: U.S. Treasury debt prices pare gains * CURRENCIES: U.S. dollar rebounds versus euro, pares losses against the yen * STOCKS: U.S. equity indexes pare losses * RATE FUTURES: Fed fund futures trim gains