Wall Street Snaps Two-day Losing Streak; Fed Rate Cut In Focus

NEW YORK (MarketWatch) -- Stocks closed higher Tuesday, snapping a two-day losing streak, with the Dow industrials buttressed by fast-food giant McDonald's Corp.'s solid August sales and word from General Motors Corp. that it is enticing buyers with fewer incentives.

Investors also found comfort in the belief the Federal Reserve would likely cut interest rates at next week's policy-setting meeting by the central bank, with the view little altered by a speech by Ben Bernanke in Germany, in which the Fed chairman offered few, if any, clues.

"U.S. equities have maintained their support despite some brief disappointment following the unrealistic hope that Bernanke might tip his policy hand today, though most still anticipate some policy accommodation next week," said analysts at Action Economics.

The Dow Jones Industrial Average rose 180.5 points to end at 13,308.4, with 29 of its 30 components higher, led by GM , up 4.6% after the largest U.S. automaker said it was spending less on incentives for newly released crossover vehicles, and McDonald's , up 3.2% on a strong rise in August sales.

"They are on an incredible roll," Dennis Lombardi, a food industry consultant at WD Partners, said of McDonald's sales figures.

The S&P 500 was up 19.79 points to 1,471.49, and the technology-laden Nasdaq Composite gained 38.36 points to 2,597.47, with Western Digital Corp., the globe's second-largest manufacturer of hard-disk drives, up 4.4% after it upped its earnings forecast. .

Volume at the New York Stock Exchange came to 1.3 billion shares, with advancing stocks ahead of decliners 3 to 1. At the Nasdaq, nearly 1.8 billion shares were exchanged, and advancing issues topped declining stocks more than 2 to 1.

While bulls retained the upper hand Tuesday, a report by Moody's Investors Service offered one reminder of the credit crunch that has roiled the market. The rating agency said that what started as a subprime mortgage problem has spread, cutting off access to borrowing for many financially weak companies. The default rate among U.S. speculative-grade companies will more than double to 4% during the next year, Moody's predicted.

Chain gang

The retail sector gained along with the broader market, with shares of Dow member Wal-Mart Stores Inc. 1.6% higher after it revised its second-quarter profit lower by $153 million late Monday.

The International Council of Shopping Centers and UBS Securities said chain-store sales for the week ended Sept. 8 rose 2.9%. .

"The Fed is apparently paying more attention than usual to chain-store sales, both the weekly and monthly figures, because there really is no other basis to say that spending is holding up," said Tony Crescenzi, bond strategist with Miller Tabak & Co. LLC.

"To the extent the Fed believes consumer spending is holding up and will continue to hold up, it is unlikely that the Fed would have to cut interest rates as much as is now priced in," said Crescenzi.

Exports up; crude down

Early data had the Commerce Department reporting the value of U.S. exports of goods and services increased 2.7% in July, the fastest seasonally adjusted growth in more than three years. .

"For the third month in a row, both imports and exports of goods rose, signaling continued solid activity both abroad and in the U.S.," wrote Stephen Stanley, chief economist at RBS Greenwich Capital, in a note.

Crude-oil futures gained 74 cents to close at $78.23 a barrel, the highest closing level for the front-month contract traded on the New York Mercantile Exchange. OPEC reportedly agreed to raise actual production by 500,000 barrels a day, effective Nov. 1.

Fed moves

The market scrutinized Bernanke's talk to Germany's central bank, the Bundesbank, for any clues on coming Fed rate actions, with analysts looking for the Fed to cut its target rate for overnight bank lending by at last 25 basis points.

"We still believe most policymakers would prefer not to cut the funds rate, but will be forced into it, suggesting they will do the minimum of a 25 basis point reduction along with indications they will act as needed in the future," said Action Economics.

"I wouldn't be selling, after transaction costs you may well be out of the money, particularly if Bernanke does give us a 50 basis-point cut between now and Sept. 18," said Tom Elliott, head of global strategy for J.P. Morgan Asset Management in London.

"But for new money, I would be inclined to hold it in liquidity instruments like cash. I think the market is so volatile, and there's so much risk out there," Elliot said.

Bernanke's speech followed remarks Monday by four Fed officials, with all saying the U.S. faces increased risk of an economic slowdown, but none saying the slowdown had materialized. .

Active issues

Shares of ImClone Systems Inc. jumped 18.7%, and Bristol-Myers Squibb Co. climbed 0.8% after a clinical trial showed their Erbitux drug extended survival rates for patients with a form of lung cancer. .

Countrywide Financial Corp. fell 1.9% after a New York Post report that the nation's largest mortgage lender had hired Goldman Sachs to line up another multibillion-dollar investment in the company, just weeks after Bank of America made a $2 billion investment.

PepsiCo Inc. shares gained 2.1% after the company's upgrade to buy from hold at Goldman Sachs, which also upgraded the beverage sector to attractive from neutral, citing improving fundamentals and reasonable valuation.

Shares of Take-Two Interactive Software gained 4.2% after the video game publisher narrowed its quarterly loss.

After the close, Texas Instruments is due to give a mid-quarter update. Its stock gained 1.4%.

Other markets

The dollar fell slightly against key currencies, with the greenback off 0.2% against the euro, at $1.3826.

On the NYME, gold futures climbed $8.90, or 1.3%, to close at $721.10 an ounce. .

Treasury prices slipped, with the benchmark 10-year note falling 11/32 to 103 2/32, yielding 4.368%. .

Overseas, China's inflation hit a 10-year high during August and its trade surplus widened to the second largest on record.

The Nikkei 225 closed with a 0.7% rise in Tokyo. The FTSE 100 climbed 1.5% in London.

By Kate Gibson