Prices, Profits on the Rise

U.S. markets will be closed Friday to observe a day of mourning for former President Ronald Reagan, whose state funeral will draw domestic dignitaries and foreign leaders amid tight security.

The Dow rose 41 points to 10410, while the Nasdaq added 9, pulling up a fraction shy of 2000. The S&P 500 advanced 5 to 1136.

Semiconductor stocks perked up after an industry group forecast a 29% gain in global chip sales, up from its prior forecast of a 19% boost in 2004. But that should prove to be the sector's peak, with the Semiconductor Industry Association anticipating 10% annual growth through 2007, a pace below the historical norm.

The global appetite for energy is also increasing at an impressive clip. Crude prices topped $38 a barrel, ending a short, sharp slide, as the International Energy Agency said global demand should grow at nearly 3% this year, the fastest pace since 1981.

Meanwhile, strong prospects for consumer spending are stoking merger speculation among retailers. Dillard's (DDS) shares popped 15% after analysts for Bank of America and UBS identified it as a possible takeover target, one of them likening the chain to the last girl standing at a dance.

Target (TGT) persuaded upmarket retailer May Department Stores (MAY) to snatch up its Marshall Field's unit as well as nine Mervyn's stores for a cool $3.24 billion cash. That was higher than Wall Street was expecting, as Target's underperforming subsidiary drew competing bids from Filene's parent May as well as rival Federated (FD), which runs Macy's and Bloomingdale's. Target shares inched up 12 cents. May's share price slipped but a penny after the company said the purchase would boost earnings by fiscal 2005.

FedEx (FDX) shares rose 1% after the leading shipper hiked profit guidance 10% above Wall Street's quarterly operating estimate. "We continue to see strong and sustainable economic recovery across many sectors of the economy that we serve," reported the boss.

The unemployed are starting to find jobs as the labor market recovers. First-time jobless claims rose by 12,000 last week, but the total number of people collecting benefits fell by 106,000, to the lowest level in three years.

Unfortunately, the strong recovery is now driving up inflation and interest rates. Import prices have risen 7% in a year's time, and while the 44% jump in the cost of oil played a big part, prices outside the energy sector still rose 3%. Import prices rose a worrisome 1.6% in May alone, twice the gain forecasters were expecting.

And that excludes the mounting cost of homegrown services. For instance, the average fee paid by H&R Block (HRB) tax-preparation clients is up 8% year-over-year, enabling the chain to outstrip expectations for another lucrative filing season with a 16% profit gain. The company's increasingly important mortgage business is not expected to undermine the earnings outlook even as lending profits drop under pressure from higher interest rates. Gains in software sales and online tax preparation offset a decline in the number of traditional tax clients amid growing competition. The stock ticked up not quite 1%.

Bonds held their ground as strong demand for new notes from investors offset inflation worries. The yield on the 10-year Treasury note slipped to 4.79%.

European markets closed mixed, while Japan's gained 1% as unexpectedly strong machine orders excited increasingly bullish investors.