Wall Street rose sharply Tuesday as investors grew more confident that the Federal Reserve will lower interest rates next week, even after its chairman gave no clues about the central bank’s intentions. The Dow Jones industrials rose 180 points.
Traders had been hoping Fed Chairman Ben Bernanke would give some indication during a speech to Germany’s Bundesbank about the Fed’s next move. Wall Street is looking for a rate cut to help bolster the U.S. economy and ease problems caused by tightening credit availability.
Instead, Bernanke talked about the need for countries around the globe to cooperate toward economic stability. He said “global imbalances” occur when countries run up trade deficits or produce big trade surpluses.
“Bernanke didn’t really say anything about interest rates, but at this point the feeling on Wall Street is that it’s mandatory,” said Steven Goldman, chief market strategist, Weeden & Co., speaking about a rate cut. “At this point, the market is pricing in not just one rate cut, but a couple, and that’s helping to stabilize stocks.”
The stock market has been volatile since midsummer, with jitters high about the sluggish housing market and debt aversion causing a standstill in the credit markets and damaging the economy. Last Friday’s jobs report, which showed the first monthly payrolls decline in four years, aggravated those concerns. Mark Zandi, chief economist at Moody’s Economy.com, predicted the risk of a recession in the next six to 12 months has increased to nearly 40 percent from less than 15 percent before subprime concerns began riling the markets.
Investors nervous about the U.S. economy slipping into recession got a bit of relief from the Commerce Department’s report on the U.S. trade deficit. The trade gap narrowed modestly in July to $59.2 billion from $59.4 billion in June, thanks to record exports of farm goods, autos and other products. Many economists had anticipated a widening of the deficit.
The Dow rose 180.54, or 1.38 percent, to 13,308.39.
The Standard & Poor’s 500 index rose 19.79, or 1.36 percent, to 1,471.49, while the Nasdaq composite index rose 38.36, or 1.50 percent, to 2,597.47.
Bonds fell as investors withdrew money to buy stocks, pushing the 10-year Treasury note’s yield up to 4.37 percent from 4.27 percent late Monday. The dollar weakened against the euro and British pound, while gold moved higher.
Tim Krause, director of risk management at California-based Zecco Trading, agreed that Tuesday’s rally was due to institutional investors being optimistic about a rate cut. However, he’s not entirely convinced the Fed will cut rates ,given that it will impact an already weakened dollar — which is now near a record low versus the euro.
“The Fed is between a rock and a hard place,” he said. “If they lower interest rates, the dollar will keep getting crushed. If they don’t, the subprime mess will get worse and hurt the housing market.”
Though much of the attention was on the central bank, there was some corporate news that influenced stocks.
The Nasdaq got a boost due to ImClone Systems Inc., which along with Bristol-Myers Squibb Co. said the drug Erbitux improved the survival rate of lung cancer patients in a late-stage study. ImClone soared $6.97, or 18.4 percent, to $44.90. Bristol-Myers rose 23 cents to $28.23.
The Dow, meanwhile, benefited from strong gains in McDonald’s Corp. shares. The fast food chain, which is one of the 30 companies that make up the Dow, rose $1.61, or 3.2 percent, to $51.76 after reporting that global sales at restaurants open at least a year rose 8.1 percent in August.
Boeing Co. also helped the blue chips advance after it was awarded a $1.1 billion U.S. Air Force contract. Shares picked up $2.11, or 2.2 percent, to $97.44.
General Motors Corp. rose $1.33, or 4.6 percent, to $30.54 as investors got a glimpse of new models at the Frankfurt Auto Show.
Crude oil rose 74 cents to $78.23 after OPEC agreed to boost its crude output by 500,000 barrels a day in an effort to calm markets unnerved by high energy prices and worried that supplies could grow tight by the end of the year. It was expected that OPEC would keep current output targets in place, although Saudi Arabia was said to be pushing for a production increase.
Advancing issues outnumbers decliners about 2 to 1 on the New York Stock Exchange, where consolidated volume came to 2.97 billion shares, compared to 2.87 billion on Monday.
The Russell 2000 index of smaller companies was up 12.46, or 1.62 percent, at 782.27.
Overseas, Japan’s Nikkei stock average added 0.71 percent. Britain’s FTSE 100 rose 2.13 percent, Germany’s DAX index rose 1.02 percent, and France’s CAC-40 rose 1.69 percent.