Wall Street up on rate and subprime hopes

Wall Street stocks were mostly higher on Friday, rising for a fourth consecutive day, as hopes for further interest rate cuts and a nascent plan to help subprime borrowers lifted a range of financial companies and homebuilders.

Bond yields were higher and the dollar was mixed, but oil prices tumbled below $90 a barrel for the first time since the end of October.

In early afternoon the S&P500 was up 0.7 per cent at 1,480.60. The Dow Jones Industrial Average rose 0.5 per cent to 13,380.01, below its high for the session.

However the Nasdaq Composite was trading fractionally lower at 2667.54 as disappointing results from Dell weighed on the index.

News that Motorola’s chief executive Ed Zander will step down at the end of the year put the troubled mobile phone maker in focus on Friday. The shares rose 0.4 per cent to $15.71.

Mr Zander will be replaced by Greg Brown, president and chief operating officer, but will remain chairman until May 2008.

Shares in Dell plummeted 13.5 per cent to $24.34 after its quarterly profit missed Wall Street’s expectations and weak US consumer sales unsettled investors.

In a speech late on Thursday, Ben Bernanke placed the central bank on a path towards a December rate cut as he said the relapse in financial markets had resulted in a “tightening in financial conditions” that had the potential to harm the real economy.

Money market rates continued to rise on Friday, and are sharply higher over the week, as banks remain reluctant to lend to each other as year-end approaches.

The Fed chairman also said recent data on household spending had been “on the soft side” and warned that the combination of higher petrol prices, the weak housing market, tighter credit conditions and declines in stock prices seemed likely to create some headwinds for the consumer in the months ahead. He concluded that the central bank would have to be ”exceptionally alert and flexible.”

Interest rate futures are fully priced for a cut in the Federal funds rate to 4.25 per cent, with a 30 per cent chance of 50-point cut when the Fed meets next month.

Mr Bernanke’s dovish words sparked a big rally in banking and other financial stocks on Friday. The S&P investment bank index rose 2.5 per cent to 190.58.

The home loan industry was also in focus on reports that Hank Paulson, US treasury secretary, is working with banks to prevent a surge in foreclosures by fixing interest rates on loans to subprime borrowers.

Countrywide Financial soared 20 per cent to $11.16 after Fox-Pitt, Kelton, upgraded the shares to outperform because it said the mortgage lender was likely to benefit most from the Treasury plan to freeze mortgage resets.

Freddie Mac and Fannie Mae, the government-sponsored mortgage agencies rose 13.5 per cent to $33.50 and 14.05 per cent to $36.94 respectively.

Homebuilder stocks also soared on news of the plan. The S&P homebuilder index climbed 10.6 per cent to 330.72. Pulte Homes gained 8.5 per cent to $10.24.

In economic news, Commerce Department data showed US consumer spending increased by a smaller-than-expected 0.2 per cent in October while personal income rose at a 0.2 per cent annual rate.

Economists had predicted a 0.3 per cent rise in spending and 0.4 per cent increase in personal income.

“Higher oil prices are pushing up overall inflation and eating into real disposable income gains,” John Ryding chief US economist at Bear Stearns, said.

The personal consumption expenditure price index, a barometer of inflation pressure closely watched by policy makers, rose 0.3 per cent. Core PCE, which strips out food and energy rose at a 0.2 per cent rate, in line with expectations.

The rally in equities this week brought to an end a tempestuous month for US stocks with the major indices posting their biggest monthly falls since the end of 2002.

In early-afternoon on Friday the S&P 500 was on course for its biggest weekly advance in eight months, up 3 per cent. However the index was on pace for its worst monthly performance in more than four years, down 4.2 per cent.

The Dow Jones Industrial average was up 3 per cent for the week but was still down 3.6 per cent this month.

The Nasdaq Composite, 6.3 per cent lower at 2667.17 this month, was particularly disappointing in light of technology’s previous market leadership this year. Confidence in the sector’s ability to ride out a downturn in US corporate spending waned.