Stocks end higher on oil's drop, financials

NEW YORK (Reuters) - Stocks rose in thin trade on Thursday as another decline in the price of oil buoyed hopes that consumer spending will recover and financial shares bounced back from a sharp two-day sell-off.

The market had initially fallen after government data showed consumer prices rose at twice the rate expected in July, while weekly jobless data showed further deterioration in the labor market.

But while inflation remains a concern, investors were optimistic that recent drops in the prices of key commodities, particularly oil, will ease inflation strains in the long run.

"Crude oil's pulling back has taken the pressure out of the inflation picture. This translates to a natural rebound in equities," said Craig Peckham, equity trading strategist at Jefferies & Company in New York.

"The market is really looking through the inflation data this morning, which was quite scary on a headline basis, and taking a more forward-looking view that the inflation pressures are likely to be easing."

An index of S&P financial stocks .GSPF rebounded from its worst two-day slide in six years, in part on the view that easing inflation pressures could give the Federal Reserve more leeway to hold off on interest-rate increases. The index rose 2.6 percent.

Shares of Bank of America Corp (BAC.N), the No. 2 U.S. bank, were among the top contributors to the Dow's advance, with a gain of 4.6 percent to $30.18.

The Dow Jones industrial average rose 82.97 points, or 0.72 percent, to 11,615.93, while the Standard & Poor's 500 Index climbed 7.10 points, or 0.55 percent, to 1,292.93. The Nasdaq Composite Index was up 25.05 points, or 1.03 percent, at 2,453.67.

The price of oil fell 99 cents to settle at $115.01 a barrel as economic weakness in Europe underscored the threat to growth in global oil demand and on hopes that a shaky cease-fire between Russia and Georgia would hold.

JPMorgan Chase & Co (JPM.N) was another standout in the financial sector, up 2.4 percent at $37.81, two days after the bank roiled investors with news that it had taken $1.5 billion of further write-downs in the current quarter due to the housing slump.

Shares of mortgage finance providers Fannie Mae (FNM.N) and Freddie Mac (FRE.N) also headed higher. SIFMA, an industry group, said Fannie and Freddie must limit the number of large loans in a key mortgage bond market to hold down costs for the bulk of borrowers in the struggling U.S. housing market. ID:nN14509364

On the outlook for housing, former Federal Reserve Chairman Alan Greenspan told The Wall Street Journal that U.S. house prices will begin to stabilize in the first half of 2009.

Fannie Mae jumped 7.7 percent to $8.23 and Freddie Mac climbed 7 percent to $5.94. The Dow Jones home construction index .DJUSHB rose 4.6 percent.

Shares of biotechnology company Amgen (AMGN.O) gained 1.1 percent to $64.21 after its stock was recommended by Goldman Sachs, which added it to its "conviction buy" list.

Shares of Wal-Mart Stores (WMT.N) rose 0.4 percent to $58.10. The world's largest retailer reported a stronger-than-expected second-quarter profit but gave a cautious outlook for the current quarter.

The government data included the Labor Department's Consumer Price Index, which rose in July at the fastest annual inflation rate in 17-1/2 years, due largely to energy and food costs. Another department report showed the number of people filing new claims for jobless benefits was above economists' expectations, suggesting weakness in the labor market.

Trading volume was low on the New York Stock Exchange, with about 1.01 billion shares changing hands, below last year's estimated daily average of roughly 1.90 billion, while on Nasdaq, about 1.85 billion shares traded, also less than last year's daily average of 2.17 billion.

Advancing stocks outnumbered declining ones by 2 to 1 on the NYSE and by about 3 to 2 on the Nasdaq.

(Editing by Jan Paschal)