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Markets & Finance

Stocks End Higher

Stocks finished higher on Tuesday after the Federal Reserve raised interest rates by a quarter point, as expected. Oil prices retreated, while a lower-than-expected rise in second-quarter unit labor costs helped calm inflation concerns after a jump in wage growth in the July labor report last Friday.

The Dow Jones industrial average rose 78.74 points, or 0.75%, to 10,615.67. The broader Standard & Poor's 500 index was up 8.25 points, or 0.67%, to 1,231.38. The tech-heavy Nasdaq composite added 9.8 points, or 0.45%, to 2,174.19.

September NYMEX crude oil settled down 87 cents at $63.07 a barrel, after hitting a new record high of $64.27 in overnight electronic trading. The story remains the same for the petroleum complex, with security threats in Saudi Arabia combining with concerns of supply shortfalls of refined products supporting prices, says Action Economics.

At Tuesday's meeting of the Federal Reserve's policy-setting arm, the Federal Open Market Committee raised its target fund rate another quarter point to 3.50%.

The Fed's statement retained "accommodative" and "measured" and said "aggregate spending appears to have strengthened since last winter" and labor markets continue to improve "gradually," notes Action Economics. The Fed added that price pressures remain elevated though core inflation has been "relatively low" and that longer term inflation expectations remain well contained.

"FOMC's statement didn't rock any boats as it was pretty close to expectations", says Action Economics, adding that "it pretty much guarantees another 25 basis point hike on Sept. 20, and reads more like policymakers perceive they are still somewhere near the middle of their rate hike cycle, rather than nearing the end."

In economic news, second-quarter nonfarm productivity rose at a 2.2% pace, slipping from the surprisingly robust 3.2% surge (revised from 2.9% previously) in the first quarter, and is the slowest since the 1.3% gain in the third quarter of 2004.

Unit labor costs rose a mere 1.3%, vs. the 3.6% increase in the first quarter (revised from 3.3%). On a year-over-year basis, productivity was up 2.3% vs. the 2.9% pace from the first quarter, while unit labor costs were at a 4.3% pace, from 3.7%.

U.S. wholesale sales rose 0.6% in June following a 0.1% increase in May. Inventories rose 0.7% after a 0.3% increase. The inventory/sales ratio was steady at 1.19.

There is no major economic data coming out Wednesday.

Among stocks moving Tuesday, Delta Air Lines (DAL) lost ground on news that the carrier replaced its treasurer with former Delta assistant treasurer. S&P cut its price target to $1.50, while Merrill Lynch reportedly downgraded the stock to sell from neutral.

Companies on the earnings calendar today include networking equipment maker Cisco Systems (CSCO) and Walt Disney (DIS).

Blockbuster (BBI) reported a second-quarter loss per share of 22 cents, vs. 27 cents earnings per share, on 1.6% lower revenue. As a result of uncertainty and continued decline in rental industry, the company says it is no longer on track to achieve 2005 guidance; withdraws previous 2005 guidance.

Echostar Communications (DISH) posted $1.89, vs. 18 cents, second-quarter EPS (basic) on 18% revenue rise. The satellite company notes second-quarter 2005 EPS includes a non-recurring, non-cash benefit of $1.31 to recognize tax benefits of previously reported tax losses. (PCLN) posted 29 cents, vs. 28 cents, second-quarter EPS (GAAP) on a 2.8% revenue rise. It posted 41 cents pro forma EPS. The company sees 34-40 cents third-quarter EPS (pro forma) on 2.5% revenue rise and 35% increase in gross travel bookings.

Treasury Market

Treasury prices rose, sending the benchmark 10-year yield down to 4.39%, as the Fed's policy statement wasn't as hawkish as feared, says Action Economics. The front end outperformed slightly on the Fed's announcememnt, with the yield on the 2-year note falling a few basis points back to 4.10%, says Action Economics.

World Markets

European stock markets closed with gains on Tuesday.

London's Financial Times-Stock Exchange 100 index was up 19.4 points, or 0.36%, to 5,363.7 as U.K. June trade gap was less than expected ??4.28 billion, down from May's ??4.98 billion slide. U.K. retailers had their poorest July in a decade due to the July 7 terrorist attacks in London and faltering housing market tempered consumers' spending. Among stocks on the move, Bradford & Bingley was lower after company said lending pace has slowed. Filtronic was higher after agreeing to sell its mobile handset antenna business to Technitrol to cut debt.

Germany's DAX index rose 71.62 points, or 1.48%, to 4,909.48 as European Central Bank Economist Issing said there are positive signs of Eurozone economic recovery. But the market was restrained by a report exports fell 0.4% in June after increasing 3.6% in May. Hochtief was higher on takeover speculation. Deutsche Boerse, which reported higher second-quarter earnings, rose after Deutsche Bank raised its rating to buy from hold.

In Paris, the CAC 40 index climbed 50.68 points, or 1.14%, to 4,491.69. France's budget deficit widened to ??35.7 billion at the end of June vs. ??32.0 billion a year earlier.

Asian markets finished mixed on Tuesday.

Japan's Nikkei 225 index rallied 121.34 points, or 1.03%, to 11,900.32 amid strong June machinery orders and expectations of a positive assessment of the economy from the Bank of Japan. After the close of trading, the Bank of Japan revised upward its assessment of the economy for the second consecutive month, citing increases in exports and wages. This offset political concerns after Prime Minister Junichiro Koizumi dissolved the House of Representatives yesterday and called for an election as his plan to privatize Japan Post was rejected.

In Hong Kong, the Hang Seng index fell 61.1 points, or 0.4%, to 15,047.84. Property counters led the Hang Seng index lower on concerns of further increases in interest rates, as the market awaited the U.S. Federal Reserve's policy statement today.

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