Fed hopes boost stocks
Wall Street surges on expectations that the central bank could lower borrowing rates by as much as a half-point when it meets next week.
NEW YORK (CNNMoney.com) -- Stocks rallied Wednesday, with the Dow jumping nearly 200 points, on a mix of strong economic news and bets that the Federal Reserve will cut interest rates again at its policy meeting next week.
The Russell 2000 (Charts) small-cap index gained 1.8 percent.
Treasury prices dropped, boosting the corresponding yields. The dollar gained versus other major currencies. Oil and gold prices slipped.
Stocks slid Monday and Tuesday on worries about how the housing and credit market crisis will drag on the economy.
But mostly upbeat economic news released Wednesday helped soothe such worries, returning the focus to bets that the Federal Reserve will cut rates again.
Such bets boosted stocks last week after comments from Ben Bernanke and the Fed's No. 2, Donald Kohn, seemed to imply the central bank could lower a key short-term interest rate at the Dec. 11 policy meeting. The fed funds rate currently stands at 4.5 percent after the Fed cut it in September and October, lowering it from 5.25 percent.
"Everyone pretty much expects a cut and that's been contributing an underlying upward bias to equity prices during the recent rallies," said William Hummer, principal at Wayne Hummer Investments.
He said that a cut has been so anticipated, that if the Fed does cut rates next week, the stock reaction will be very limited. If the central bank cuts by a half, that could spark another upturn, since Wall Street will be getting what it seems to be asking for.
Thursday brings the latest interest-rate policy decisions from the Bank of England and the European Central Bank, as well as the U.S. weekly jobless claims report.
Wednesday also brought reports showing strong third-quarter productivity growth and surprisingly strong private sector employment, important ahead of Friday's broader jobs report.
Productivity grew at the fastest pace in four years, the government reported, while wage pressures dropped.
Payroll processor ADP said that its index of private-sector employment added a bigger-than-expected 189,000 jobs in November, versus forecasts for a gain of 50,000.
October factory orders rose 0.5 percent from an upwardly revised 0.3 percent in the previous month, the government reported. Economists thought orders would hold steady. However, beyond the headline number, the report may have not been quite so positive, with a lot of the gain attributed to surging energy prices.
Another report, on the services sector of the economy, was short of forecasts. The ISM services index fell to 54.1 in November from 55.8 in October. Economists thought it would fall to 55, on average. Anything over 50 signifies expansion in the sector.
U.S. light crude oil for January delivery fell 83 cents to settle at $87.49 a barrel on the New York Mercantile Exchange. Earlier, the price of oil had risen after OPEC held production rates steady, disappointing investors looking for the oil cartel to announce an increase. Also impacting oil prices: the weekly oil inventories report, which showed a big drop in crude supplies.
Stock gains covered a variety of sectors, with 28 out of 30 Dow stocks rising, led by Microsoft (Charts, Fortune 500), Hewlett-Packard (Charts, Fortune 500), United Technologies (Charts, Fortune 500), Intel (Charts, Fortune 500), Citigroup (Charts, Fortune 500) and AIG (Charts, Fortune 500).
AIG said at its investor's meeting that its exposure to bad debt as a result of the credit crisis was not substantial.
Intel (Charts, Fortune 500) rallied on a Thomas Weisel analyst upgrade, AP reported. The brokerage also cut its 2008 revenue estimate and 12-month price target on Intel rival AMD (Charts, Fortune 500).
In corporate news, Fannie Mae said it was cutting its dividend and selling $7 billion in specialized stock to raise money in expectation of more losses from high-risk loans. Fellow government-backed mortgage company Freddie Mac (Charts, Fortune 500) made a similar move last week. Fannie (Charts) shares gained.
On the downside, Comcast (Charts) tumbled over 12 percent after the biggest U.S. cable operator cut its forecast for 2007 cable revenue growth and said that it expects to lose customers in 2008 because of increased competition.
Genentech was dealt a blow after the FDA's advisory group said the company's Avastin should not be used as a breast cancer treatment. Avastin is currently approved for treating certain types of colon and lung cancer. Genentech (Charts) shares slumped 9 percent during the session before trading was halted. After the close, the stock bounced back 5 percent.
Market breadth was positive. On the New York Stock Exchange, winners trounced losers by nearly three to one on volume of 1.43 billion shares. On the Nasdaq, advancers beat decliners two to one on volume of 2.27 billion shares.
Treasury prices eased, boosting the yield on the 10-year to 3.94 percent from 3.89 percent late Tuesday. Treasury prices and yields move in opposite directions.
In currency trading, the dollar gained versus the euro and the yen.
COMEX gold for February delivery fell $3.70 to settle at $803.70 an ounce.