Stocks Pocket Big Gains with Microsoft's Help

Wall Street waved off ugly manufacturing data Thursday. But how will it respond to Friday's reports on payrolls and factory orders?

U.S. stocks finished substantially higher, with software giant Microsoft (MSFT ), a member of the Dow industrials, leading the way for blue-chips and technology issues.

"The fact that the Dow has joined in is good news. We did have some real negative news this morning, but tech stocks continued to get stronger," says Peter Cardillo, chief strategist at Westfalia Investments. "I believe that the market is beginning to discount negative news and the fear factor."

Investors focused on news that Microsoft tentatively agreed with the Justice Department to settle the historic antitrust case already won by the government. The proposed settlement would require virtually no changes in the design of its Windows software -- and leave the company's market power largely undiminished.

Microsoft led gains on the Dow and Nasdaq Composite, closing up almost 7% on news that it may soon settle its ongoing antitrust dispute. Wall Street also cheered a wire report that said Wal-Mart (WMT ) reaffirmed third and fourth quarter earnings guidance at a retailing conference held by UBS Warburg.

Terrible data on the manufacturing front only temporarily thwarted investors as many have started to place more hope in a rebound in 2002, sparked by monetary and fiscal stimulus.

The October read on the National Association of Purchasing Managers' index was disappointing and pulled stocks lower Thursday morning. The closely-watched gauge of nation's manufacturing sector plunged to 39.8 from September's surprisingly firm 47.0. The October number is yet another indication that the U.S. economy is mired in recession, and boosts the chances of a 50 basis point interest rate cut by Federal Reserve policymakers at their Nov. 6 meeting.

September personal income was unchanged and consumption fell 1.7%. Standard & Poor's had forecast a 0.2% drop in income and a 1.7% fall in spending.

On the labor front, initial jobless claims eased to 499,000 for the week ending Oct. 27, from an upwardly revised 509,000 in the prior week. But S&P notes that overall, the labor picture remains one of steady deterioration. And there is a real risk that the October employment report, scheduled for release Nov. 2, may contain some nasty surprises.

Economic reports on payrolls and factory orders are expected on Friday. S&P's MMS expects payrolls to drop 400,000 and the unemployment rate to jump to 5.3% from 4.9%. Due to the timing of the September survey, the terrorist attacks are not likely factored in. This means that the October data should reflect the attacks.

MMS expects Friday's release of September factory orders to show a 5.0% drop and shipments to decline by 3.4%. MMS expects that the 8.5% decline in durable goods orders and the 5.5% decrease in shipments revealed in the recently released durables report will hold at this level. MMS sees factory inventories down 0.8%, which would mark an eighth straight monthly decline.

Among Thursday's other stocks in the news, Enron (ENE ) said an informal SEC inquiry has become a full-scale probe of questionable financial dealings that have rocked the company in recent weeks and sent its stock plummeting.

Airline earnings were also in the spotlight. UAL Corp. (UAL ), parent of No. 2 U.S. carrier United Airlines, reported a record net loss of $1.16 billion for the third quarter. The September 11 attacks sharply lowered ticket sales at the airline. Delta Air Lines (DAL ), the No. 3 airline, posted a $295 million third-quarter loss, also blaming a slowdown in flying after the attacks.

The Dow Jones industrial average jumped 188.76 points, or 2.08%, to 9,263.90. The tech-heavy Nasdaq composite index added 56.10 points, or 3.32%, to 1,746.30. The broader S&P 500 index gained 24.32 points, or 2.29%, to 1,084.10.

Treasury Market

In a volatile session, the 30-year U.S. Treasury added to Wednesday's gains following the lousy NAPM report. The 30-year bond continued to bring buying interest after the historic announcement by the Treasury that it would suspend issuance of the benchmark debt issue. Meanwhile, shorter-dated bonds finished lower in price.

World Markets

Despite economic uncertainties that pressured them earlier, European markets finished higher as Wall Street rallied. In London, the FTSE 100 index ended higher by 31.50 points, or 0.63%, to 5,071.20, as Britain's October retail sales grew at the slowest pace of the year and house prices fell for the first time in nine months. The Paris CAC 40 index added 25.65 points, or 0.59%, to 4,366.94. In Germany, the DAX index ended higher by 77.00 points, or 1.69%, to 4,636.13. European treasuries are seeing some interest as European investors flee U.S. markets for better yielding fixed-income investments.

In Asia, markets finished mixed. Japan's Nikkei dropped 19.06 points or 0.18%, to 10,347.28 as a drop in bank shares ate into gains. A report from Standard & Poor's said Japanese banks face high interest-rate risks. In Hong Kong, the Hang Seng index jumped 84.88 points, or 0.84%, to 10,158.85.

By Amy Tsao in New York

Before it's here, it's on the Bloomberg Terminal.