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NEW YORK — Stocks recovered from a sharp dip Thursday as weaker-than-expected economic data led Wall Street to believe chances are improving for the Federal Reserve to lower interest rates.
Fed Chairman Ben Bernanke is expected to speak Friday in Wyoming, and said in a letter to Sen. Charles Schumer, D-N.Y., that Fed policymakers are “prepared to act as needed” if the market’s turmoil damages the economy.
The Commerce Department said second-quarter gross domestic product grew 4.0% — its fastest pace in more than a year, and well above the 0.6% increase in the first quarter. But the figure was slightly lower than many anticipated, and the report also suggested that business investment, not consumer spending, was the main driver of growth.
In a sign that Americans’ spending power may keep declining, the Labor Department said U.S. jobless claims rose last week to the highest level since April. Employment has been one of the stronger pillars of the economy recently.
Considering how sluggish consumer spending has been so far this quarter, it’s likely to post its worst back-to-back quarterly performance since early 2000, said Michael Strauss, chief economist at Commonfund. And given all of the mortgage market troubles, “There is a growing challenge for the economy to continue to grow at a 2.5% pace in second half of the year,” he said.
To some investors, that’s not bad news, because weaker-than-anticipated data bolsters the argument for a rate cut, which could loosen up the credit markets.
In late morning trading, the Dow rose 10.65, or 0.08%, to 13,299.94, after dropping about 100 points earlier.
Broader stock indicators were also higher. The Standard & Poor’s 500 index rose 3.54, or 0.24%, to 1,467.30, while the Nasdaq rose 23.57, or 0.92%, to 2,586.73.
A worse-than-expected quarterly earnings report from Freddie Mac due to troubles in mortgage lending fueled some selling early in the day, as did signs that companies are still finding that demand is low for commercial paper. But the outlook is good for the technology sector, giving the technology-dominated Nasdaq composite index an especially large boost.
Sigma Designs posted a strong second quarter profit which, excluding special items, beat Wall Street estimates. Sigma Designs rose $5.04, or 13%, to $43.67. Other tech stocks — including Apple Inc., Cisco Systems Inc., Motorola Inc., and Advanced Micro Devices — also saw solid gains.
Bond prices rose. The yield on the 10-year Treasury note, which moves inversely to its price, fell to 4.52% from 4.56% late Wednesday.
The credit markets haven’t completely sealed up, but bonds issued by companies are seeing much less demand than bonds issued by the government.
Asset-backed commercial paper outstanding decreased for the third straight week in the week ended Wednesday by 5.6%, the Federal Reserve said. That means that overall, 5.6% of asset-backed commercial paper was unable to be rolled over. Commercial paper comprises bonds issued by companies as a way for them to get cash quickly.
According to iMoneyNet Inc., in the week ended Tuesday, money market mutual fund investors drew cash out of prime funds — some of which invest in commercial paper — and instead padded their government fund assets.
The Fed injected a total of $10 billion into the banking system Thursday through repurchase agreements, in an ongoing effort to keep the markets liquid. A big reason behind the recent credit tightening has been defaults and delinquencies in subprime loans, which have led to losses for lenders and those who invested in mortgage-backed assets.
Government-sponsored Freddie Mac, the nation’s second-largest buyer and guarantor of home mortgages, said its second-quarter profit dropped 45%, after it recorded larger provisions on its books for bad loans. Freddie Mac fell $3.07, or 4.8%, to $60.19.
The Russell 2000 index of smaller companies rose 3.71, or 0.47%, to 791.03.
The dollar was higher against most other major currencies except the yen. Gold prices fell.
Light, sweet crude fell 40 cents to $73.11 a barrel on the New York Mercantile Exchange.
Japan’s Nikkei stock average rose 0.88%, Hong Kong’s key index rose 2.02%, and China’s Shanghai Composite Index rose 1.14%.
In Europe, Britain’s FTSE 100 rose 0.96%, Germany’s DAX index rose 0.33%, and France’s CAC-40 rose 1.37%.
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