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Markets & Finance

Dow Hits New High as Fed Stands Pat

Policymakers saw "firmer" growth and said core inflation had "improved modestly." Also in focus: fourth-quarter GDP, earnings

Stocks finished broadly higher Wednesday, as the Dow hit a new all-time closing high following the Federal Reserve's decision to keep interest rates steady. Investors were also assessing mixed earnings news and a stronger-than-expected report on economic growth, while oil prices surged above $58. Traders now turn their focus to Friday's employment report, says Standard & Poor's Equity Research.

On Wednesday, the Dow Jones industrial average rose 98.38 points, or 0.79%, to 12,621.69, above its previous closing record of 12,621.69 set Jan. 24. The broader Standard & Poor's 500 index added 9.42 points, or 0.66%, to 1,438.24. The tech-heavy Nasdaq composite was up 15.29 points, or 0.62%, to 2,463.93.

NYSE breadth was decidedly positive, with 23 issues advancing and 11 declining. Nasdaq breadth was 17-13 positive.

In economic news, the Fed left its federal funds rate target unchanged at 5.25% for a fifth consecutive meeting, as was widely expected, and maintained its bias toward tighter policy. The vote was unanimous.

In a statement issued at the close of the meeting, the FOMC said "[r]ecent indicators have suggested somewhat firmer economic growth, and some tentative signs of stabilization have appeared in the housing market." The FOMC said the economy seems likely to expand at a moderate pace over coming quarters.

Policymakers also said readings on core inflation have improved "modestly" in recent months, and inflation pressures seem likely to moderate over time.

"This looks like a Goldilocks statement to go with the recent good news on the economy and prices," says Action Economics.

The announcement comes as good news for the markets, analysts say. "It seems like the Fed's forecast from last summer is running according to plan," says Alan Gayle, senior investment strategist at Trusco Capital Management. "The Fed feels that overall growth is stable but continuing, and that inflation progress is being made."

The report suggests the Fed may stay on the sidelines for some time to come, others add. "I think they'll be pretty much pinned all year long by the fact that the real side of the economy is reasonably strong and the inflation reports are pretty mild," says Lincoln Anderson, chief economist and chief investment officer at LPL Financial Services. "They're right there in the sweet spot."

Looking ahead, Thursday's calendar holds data on the Institute for Supply Management's index of manufacturing activity, December personal income, January unit vehicle sales, and weekly jobless claims. Friday's employment report highlights the week's remaining docket.

In other economic news Wednesday, U.S. gross domestic product jumped 3.5% in the fourth quarter, more than expected, after the third quarter's 2% gain. The U.S. employment cost index rose 0.8% in the fourth quarter, from a 1% pace in the third quarter.

This unexpected strength comes as other reports have suggested 2007 economic growth may be firmer than some have forecast, analysts say. "Two quarters of data have passed since the Fed paused, and the economy is showing considerable resiliency," says John Ryding, chief U.S. economist at Bear Stearns. "As a result, the Fed is less likely now to view the lagged effects of prior policy moves as slowing growth going forward."

The Chicago Purchasing Manager's Index of regional manufacturing activity fell to 48.8 in January, from 51.6 in December. That reading is much weaker than expected and belies other recent data, says Action Economics.

U.S. construction spending dipped 0.4% in December, a slightly softer reading than expected, after an upwardly revised 0.1% increase in November.

Among Wednesday's stocks in the news, Boeing (BA) was higher after the aerospace company said its fourth-quarter profit more than doubled.

Fellow Dow component Altria (MO) was down slightly after the tobacco giant reported a 29% bump in fourth-quarter earnings and said it will spin off its 89% stake in Kraft (KFT) on March 30.

Eastman Kodak (EK) was higher after the photographic company swung to a profit of $16 million in the fourth quarter.

Eli Lilly (LLY) was higher after the drugmaker posted an 81% drop in fourth-quarter earnings that still topped analyst estimates.

On the downside, Time Warner (TWX) was lower after the media conglomerate reported a 34% rise in fourth-quarter net income, in line with Wall Street expectations.

AllState (ALL) was lower as the insurer's 17% increase in fourth-quarter earnings fell short of analyst forecasts.

SanDisk (SNDK) was sharply lower after the maker of flash memory cards swung to a $35 million fourth-quarter loss and said prices will fall this quarter.

Juniper Networks (JNPR) was also solidly lower after the networking equipment maker withheld quarterly results for a third straight quarter amid the fallout from a stock options probe.

After the close, Google (GOOG) reported fourth-quarter earnings of $1.03 billion, topping analyst estimates.

Companies set to report earnings Thursday include Exxon Mobil (XOM) and Amazon (AMZN).

On the M&A front, Bristol-Myers Squibb (BMY) was higher on a report the company hired Morgan Stanley, Citigroup, and Lehman Brothers for advice on a possible takeover of the company.

U.S. Airways (LCC) was higher on news the airline withdrew its bid for Delta Air Lines (DALRQ.PK).

In the energy markets, March West Texas Intermediate crude oil futures rose $1.17 to $58.14 a barrel in volatile trading, despite a weekly inventory report showing an unexpectedly large increase in crude supplies. Middle East tensions may be contributing to oil's gains, says S&P.

European markets finished mostly lower. The FTSE-100 index in London fell 38.9 points, or 0.62%, to 6,203.1. Germany's DAX index nudged higher 0.88 points, or 0.01%, to 6,789.11. In Paris, the CAC 40 index dropped 37.28 points, or 0.66%, to 5,608.31.

Asian markets ended lower. In Japan, the Nikkei 225 index lost 106.77 points, or 0.61%, to 17,383.42. In Hong Kong, the Hang Seng index slid 354.04 points, or 1.73%, to 20,106.42. Korea's Kospi index declined 10.49 points, or 0.77%, to 1,360.23.

Treasury Market

Treasury yields pressed lower despite the Fed statement's adjustments for improving growth and stabilization in the housing sector. The 10-year note rose in price to 98-16/32 for a yield of 4.82%, while the 30-year bond climbed to 93-17/32 for a yield of 4.92%.

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