Stocks Finish Solidly Higher

Moves in equities and Treasury yields indicate increasing confidence that the Fed will ease interest rates on Sept. 18

by David Bogoslaw

U.S. stock indexes ended higher on Tuesday, though below their best levels of the session, as the markets seemed to be gaining confidence that economic signals will compel the Federal Reserve to cut interest rates at its policy meeting two weeks from now. Economic data released Tuesday came in weaker than expected, but weren't bad enough to confirm that the tumult that's hit financial markets will hamper future economic growth.

Technology stocks continued to lead, with Hewlett Packard (HPQ) hitting a seven-year high and International Business Machines Corp. (IBM) reaching a six-year high. Tech notables Apple Inc. (AAPL), Intel Corp. (INTC), and Cisco Systems (CSCO) also logged gains.

The Dow Jones industrial average closed 91.12 points, or 0.68%, higer at 13,448.86 on Tuesday. The broader S&P 500 gained 15.43 points, or 1.05%, to 1,489.42. The tech-heavy Nasdaq composite index climbed 33.88 points, or 1.30%, to 2,630.24.

On the New York Stock Exchange, 23 stocks posted gains for every 10 that lost ground, while the ratio was 19 to 11 positive on the Nasdaq Stock Exchange.

Declines in the 2-year Treasury yield and the Fed funds futures contracts point to expectations of a more aggressive reduction in target Fed funds rate, with 75 basis points worth of easing already priced in by the end of this year, said Keith Hembre, chief economist at First American Funds in Minneapolis.

"If you're looking for a positive catalyst for the equities market, it’s the benefit that lower interest rates will have for future economic activity and future earnings," which can be directly inferred from Fed Chairman Ben Bernanke's remarks on Fed policy at Jackson Hole, Wyo., last Friday, Hambre said.

The Institute for Supply Management's manufacturing index fell to 52.9 in August from the 53.8 reading in July. While the rate of expansion is slowing from a 16-month high of 56.0 in June, the headline figures were in line with expectations and an increase in the employment component to 51.3 from 50.2 "suggests a still healthy labor market environment," Action Economics said.

Construction spending came in weaker than expected, falling 0.4% in July instead of the projected 0.1% increase, after a 0.1% gain in June, which was revised from a 0.3% drop. Residential spending fell another 1.4%, and is down 15.6% from July, 2006, partially offset by a 0.6% rise in non-residential spending, which is 13.9% higher than a year ago.

Action Economics said it now anticipates a $4.0 billion downward bump in residential and $1.0 billion downward adjustment for nonresidential construction to lower the final economic growth report for the second-quarter to 3.8% from 4.0%.

Further softening in vehicle sales in August bolstered the case for the Fed's easing interest rates. Ford Motor Co. (F) reported a 14% drop in U.S. sales of cars and light trucks, hurt by a confluence of the housing-market slump, high fuel prices and tightening credit conditions. Chrysler's sales slipped 6.1% and Toyota (TM) sales fell 2.8% in August, while increases of 6.0% at General Motors (GM) and 6.3% at Nissan Motor Co. (NSANY) were driven by strong pickup truck sales. It was wariness among consumers of committing to another expense of $500 a month rather than an inability to get credit that largely drove the declines, CNBC Business News said.

But it's the payroll figures due out later this week that most people are waiting for to convince Bernanke that the liquidity crunch and troubles in the financial sector are affecting the broader economy and warrant a cut in the Fed funds rate.

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