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US stock markets gain altitude as rate cut sensed

08 December, 2007

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Wall Street enters the home stretch of 2007 in an upbeat mood as investors brace for a meeting of the Federal Reserve which is widely expected to yield a third straight cut in US interest rates.

The market generally cheers interest rate cuts and most economists are calling for Fed policymakers, led by chairman Ben Bernanke, to reduce US borrowing costs by a quarter percentage-point on Tuesday.

Investors believe the central bank will trim its short-term Fed funds rate to help underpin economic momentum which is expected to slow in coming months.

In the week to Friday, the Dow Jones Industrial Average surged 1.90 percent to 13,625.58.

The broad market Standard & Poor's 500 advanced 1.59 percent to 1,504.66 and the tech-heavy Nasdaq jumped 1.70 percent to 2,706.16.

Market participants said the past week's stock gains were bolstered by a mortgage rescue plan backed by US President George W. Bush which seeks to assist subprime mortgage borrowers through possible rate freezes on their home loans.

Further rate cuts would likely help the plan and economic momentum. But analysts say the Fed may be divided on the rate move after some speculation about a half-point cut.

"It is likely we will get a rate cut, but that will probably be 25 basis points at best," said Joel Naroff, chief economist at Naroff Economic Advisors.

The short-term Fed funds rate is currently pegged at 4.50 percent.

Some analysts, however, are already peering past the Fed's meeting scheduled for Tuesday.

"After we pass the Fed, the biggest part of the picture is really going to be on the consumer and how things are going at the retailers," said Marc Pado, a market analyst at Cantor Fitzgerald.

Wall Street is hoping the legendary American consumer keeps spending through the crucial Christmas holiday period which is typically when many big retailers book their biggest profits of the year.

Although the Fed meeting will be the top highlight of the coming week, investors will get a fresh update on activity in stores next Thursday when the government releases a survey on November retail sales.

Sales are expected to grow by 0.5 percent compared with a 0.2 percent gain in October, but concerns are mounting that consumer spending is being pressured by a prolonged housing slump, tight credit and high energy costs.

Other economic reports due for release in the coming week include a survey on the US trade deficit with its major trading partners and separate reports on wholesale and consumer price inflation.

Consumer price inflation (CPI) is forecast to have ticked up 0.6 percent in November compared with a 0.3 percent rise in the prior month while producer price inflation (PPI) is expected to have surged 1.5 percent in November from a mild 0.1 percent gain in October.

"If we get tame inflation data, I think it will be very helpful and supportive of whatever the Fed does," Pado said.

Bond prices weakened in the past week as investors moved into stocks. The yield on the 10-year Treasury bond rose to 4.120 percent from 3.972 percent a week earlier, and that on the 30-year Treasury climbed to 4.585 percent from 4.403 percent. Bond prices and yields move in opposite directions.

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