Stocks rallied on Friday after a report showed stronger than expected economic growth in the third quarter. Investors seemed relieved that the indictments in connection with the CIA leak investigation was limited to one person, top Cheney aide I. Lewis Libby.
The Dow Jones industrial average jumped 172.82 points, or 1.69%, to 10,402.77. The broader Standard & Poor's 500 index was up 19.51 points, or 1.65%, to 1,198.41. The tech-heavy Nasdaq composite index gained 26.07 points, or 1.26%, to 2,089.88.
Friday's big news was Cheney aide Lewis Libby was indicted in the CIA leak case for obstruction of justice, perjury, and false statements. No other officials, such as Bush Adviser Karl Rove, were charged on Friday. "So far this looks like an exercise in damage limitation for the Bush Administration from the financial markets' standpoint," says Action Economics.
Looking ahead to next week, Tuesday's Federal Reserve policy meeting is universally expected to result in a 25 basis point hike in the federal funds rate to 4%. The wording of the policy statement will be closely watched, as usual.
Action Economics sees only a few cosmetic changes with respect to Katrina in the Fed's statement. "With the markets looking for further hints on policy into the new year, changes to the now basic template could hamstring the new chairman, and we doubt Greenspan would want to do that," says Action Economics. "Hence, the wording is likely to largely confirm another 25 basis point hike on Dec. 13, which the markets have already priced in, and should leave the door open for another hike on Jan. 31."
Investors will also get a read on the jobs picture on Friday. Economists expect 110,000 nonfarm payrolls were added in October, and the unemployment rate to stay at 5.1%.
Other economic reports coming next week include Chicago PMI, personal income, and the personal consumption expenditures index on Monday; the national ISM manufacturing survey and auto sales on Tuesday; and productivity, labor costs, and factory orders on Thursday.
Investors cheered a few economic reports on Friday. Third-quarter gross domestic product (GDP) firmed to 3.8%, above the median forecast for 3.5%. Core PCE prices slid to 1.3%.
Friday's release of the third-quarter employment cost index (ECI) rose 0.8% (3.1% year-over-year), after a 0.7% (3.2%) second-quarter gain. "The data continue to reflect a remarkably contained inflation environment," says Action Economics.
The final October reading for University of Michigan's consumer sentiment fell to 74.2, from the preliminary 75.4 (76.9 in September) -- weaker than expected. The current conditions index dropped to 91.6 from the preliminary 95.7 (98.1 September). The economic outlook index improved to 63.2 from 62.4 preliminarily (63.3 September).
In earnings news, Microsoft (MSFT) reported first-quarter earnings per share of 29 cents, vs. 23 a year ago (both quarters include a charge), on a 6% revenue rise. For the current quarter (ending Dec. 31), Microsoft forecast revenue and earnings slightly below analysts' expectations. Still, the company maintained its earlier projections for the fiscal year ending June 30.
Treasury yields turned higher, after being down most of the session, following the grand jury indictment of Lewis Libby, Vice President Cheney's aide. "The bond market inferred that there was only enough evidence to be leveled against one individual, rather than any other important members of the Bush Administration, damaging the light safety premium on bonds," says Action Economics. And there was an asset allocation move into stocks on signs of low-inflationary growth in the data, says Action Economics. The 10-year note yield rose to 4.57%.
European stock markets finished mixed on Friday. London's Financial Times-Stock Exchange 100 index was up 30.6 points, or 0.59%, at 5,213.4.
Germany's DAX index rose 19.59 points, or 0.41%, to 4,825.64. In Paris, the CAC 40 index lost 9.7 points, or 0.22%, to 4,326.71.
Asian markets finished lower on Friday. In Japan, the Nikkei 225 index fell 70.54 points, or 0.53%, 13,346.54. In Hong Kong, the Hang Seng index lost 165.23 points, or 1.15%, 14,215.83.