Stocks Rally After GDP Report

Hopes that the Federal Reserve will not raise interest rates again sparked buying amid news that the economy slowed more than expected in the second quarter

Stocks pushed higher on Friday after a report indicated the U.S. economy grew at a slower-than-expected pace in the second quarter. The news heightened speculation the Federal Reserve will not raise rates at its Aug. 8 meeting. Investors were also digesting a fresh batch of corporate earnings reports.

On Friday, the Dow Jones industrial average climbed 119.27 points, or 1.07%, to 11,219.7. The broader Standard & Poor's 500 gained 15.35 points, or 1.22%, to 1,278.55. The tech-heavy Nasdaq composite jumped 39.67 points, or 1.93%, to 2,094.14.

In economic news, the advance reading for second-quarter GDP rose 2.5%, below the forecast for 3% growth, and down from 5.6% in the first quarter.

However, inflation heated up. The core PCE prices rose 2.3% year-over-year. The employment cost index (ECI) increased 0.9% in the second quarter, above the median forecast and up from 0.6% in the first quarter.

And the final July consumer sentiment figure from the University of Michigan rose to 84.7, from the preliminary level of 83.0 (vs. 84.9 in June) -- this was stronger than expected.

Next week, the main event is Friday's employment report. Other reports include Chicago PMI, personal income and PCE (along with another read on core PCE deflator), ISM, and vehicle sales. "We'll look for confirmation the Fed can pause on Aug. 8," says Action Economics. A few Federal Reserve members will also be speaking on various issues.

Among stocks moving Friday, electronics retailers Circuit City Stores (CC) and Best Buy (BBY) headed higher after Raymond James upgraded the stocks to strong buy from market perform.

In deal news, Wal-Mart Stores (WMT) says it will sell its German retail business to Metro AG; the terms were not disclosed. It sees a pre-tax loss related to the deal of about $1 billion for the second quarter of fiscal yeare 2007.

Inco (N) says its has dropped its tender offer to acquire Falconbridge (FAL) expired, as the minimum tender condition of 50% of Falconbridge shares had not been satisfied.

On the earnings front, energy companies continue to report strong results. Constellation Energy (CEG) posts better-than-expected second-quarter earnings per share of 56 cents (adjusted), vs. 59 cents a year ago, as higher expenses offset a 27% revenue rise.

McKesson (MCK) posted second-quarter EPS from operations of 65 cents, vs. 55 cents, on a 13% revenue rise. It reaffirms $2.55-$2.70 2006 EPS from operations guidance.

McAfee (MFE) shares fell after the company says as a result of an ongoing options review, it anticipates it will not file its Form 10-Q for the period ending June 30; it expects charges and expenses.

A big loser Friday was Rackable Systems (RACK), which reported disappointing second-quarter revenue and provided weak third-quarter guidance, according to First Albany.

In the energy markets, September West Texas Intermediate crude oil futures fell $1.30 to $73.24 a barrel. Sources cited the weak GDP data as the catalyst, as the slowing growth rate is expected to weigh on demand, says Action Economics. Also, there was a report that Israeli troops withdrew from northern Gaza after a bloody attack.

European equity markets posted gains on Friday. In London, the Financial Times-Stock Exchange 100 index gained 45.4 points, or 0.77%, to 5,974.9. Germany's DAX index rose 46.35 points, or 0.82%, to 5,705.42. In Paris, the CAC 40 index was up 27.3 points, or 0.55%, to 5,028.51.

Asian markets finished higher. Japan's Nikkei 225 index rose 163.09 points, or 1.07%, to 15,342.87. In Hong Kong, the Hang Seng index edged up 38.27 points, or 0.23%, to 16,955.04.

Treasury Market

The weaker-than-expected second-quarterGDP report lifted bonds on the perception the Fed will not raise rates at its Aug. 8 meeting. The 10-year Treasury yield dipped under the 5.00% mark Friday, settling at 4.99%.

"In the wake of elevated Fed pause hopes, this evidence of the Fed's predicted economic slowing provided a platform for bulls to charge the 5.0% area across the coupon curve," says Action Economics.

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