Wall Street bets on rate cuts

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NEW YORK (CNNMoney.com) -- Stocks jumped Monday as investors welcomed a stronger-than-expected pending home sales report and geared up for Tuesday's expected interest-rate cut from the Federal Reserve.

The Dow Jones industrial average (Charts) added 0.7 percent. The broader S&P 500 (Charts) index added 0.8 percent and the tech-fueled Nasdaq (Charts) composite added 0.5 percent.

Treasury prices slumped, boosting the corresponding yields. The dollar fell versus the euro and was little changed versus the yen. Oil prices dipped and gold prices rose.

The Fed's policy committee, meeting Tuesday, is widely expected to cut the fed funds rate, a key short-term lending rate, by a quarter-percentage point, to 4.25 percent, after cutting rates at the last two meetings.

Some Wall Streeters are looking for a cut of a half-percentage point, but such bets were diminished by last week's mostly upbeat November jobs report.

"I think people are pretty positive that we'll get a quarter-percentage point cut and also hoping that maybe we'll get a half-percentage point cut," said Curtis Teberg, portfolio manager of the Teberg Fund (Charts).

The central bank has been cutting the fed funds rate, which impacts consumer borrowing costs, since September, as a means of loosening up the credit market and trying to keep the economy out of falling into a recession.

Investors will also be looking to the statement Tuesday that accompanies the decision to shed further light on the Fed's outlook for the economy and the risks to that outlook.

Stocks are also continuing to coast on the positive momentum that has been in place for the last few weeks, said John Merrill, CEO at Tanglewood Capital Partners.

He said that the market has been driven over the last few weeks on a combination of technical factors and hopes that the Fed will cut rates again. As such, "we may see some selling after Tuesday, as investors take a buy on the rumor, sell on the news reaction," Merrill said.

Ahead of the meeting, Wall Street eyed the morning's pending home sales index, which showed a rise of 0.6 percent, versus forecasts that sales would fall 1 percent.

After the close of trade Monday, mortgage lender Washington Mutual (Charts, Fortune 500) said it was cutting its dividend and more than 3,000 jobs in the wake of the housing and credit market crisis.

In corporate news, UBS (Charts) issued a profit warning, said it will write down about $10 billion related to the credit market crisis and will borrow about $11.5 billion from outside investors.

Troubled bond insurer MBIA (Charts) said Monday that it will receive a $1 billion investment from private equity firm Warburg Pincus. Shares jumped around 13 percent.

McDonald's (Charts, Fortune 500), a Dow component, reported November sales at its stores open a year or more rose 8.2 percent, well above estimates. Shares gained nearly 3 percent.

MGI Pharma (Charts) rallied nearly 20 percent after the drug company agreed to be bought by Japanese drug company Eisai for $3.9 billion in cash.

McDonald's was one of many Dow components rising, with 26 of the 30 blue-chip components higher. Other gainers included Alcoa (Charts, Fortune 500), General Motors (Charts, Fortune 500), Citigroup (Charts, Fortune 500), Caterpillar (Charts, Fortune 500), Honeywell (Charts, Fortune 500) and JP Morgan (Charts, Fortune 500).

Market breadth was positive. On the New York Stock Exchange, winners topped losers 5 to 3 on volume of 1.17 billion shares. On the Nasdaq, advancers beat decliners eight to seven on volume of 1.81 billion shares.

Treasury prices slipped, boosting the yield on the 10-year note to 4.15 percent from 4.10 percent late Friday. Treasury prices and yields move in opposite directions.

In currency trading, the dollar fell versus the euro and was little changed against the yen.

U.S. light crude oil for January delivery fell 42 cents to settle at $87.86 a barrel on the New York Mercantile Exchange.

COMEX gold for February delivery rallied $13.30 to settle at $813.50 an ounce.