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Thursday, December 27, 2007

Post-Fed, Wall Street still glowing

Traders set to keep celebrating central bank's decision to cut fed funds rate by a half-percentage point.

NEW YORK ( -- U.S. stock futures were stronger Wednesday as investors continued to cheer a Federal Reserve cut aimed at restoring confidence in the financial markets.

At 7:20 a.m. ET, stocks appeared poised to open higher and extend the previous day's big advance.

The Dow Jones industrial averaged surged about 336 points, or 2.5 percent, on Tuesday after the Fed cut the target on a key interest rate by half of a percentage point.

Many on Wall Street had expected the Fed to be more cautious and lower rates by just a quarter of a percentage point. The bigger-than-expected cut lifted sentiment, as it signaled the central bank is prepared to act in order to keep the mortgage meltdown and credit crunch from derailing the economy.

Peter Cardillo, chief market economist, Avalon Partners, said that he believes that stocks still have some room to climb Wednesday, even after Tuesday's rally. He said the expiration of options on Friday will force those who had taken short positions that bet on a market decline to buy shares to cover those position.

"It looks like the party might be extended today," said Cardillo.

In global trade, Japan's benchmark Nikkei index jumped more than 3 percent on the Fed cut. Major markets in Europe rallied in morning trading.

Investors will be keeping their eye on a fresh set of economic reports due out Wednesday.

The most closely watched report will be the Labor Department's report on consumer inflation, which is set to be released at 8:30 a.m. ET. Economists surveyed by forecast that the Consumer Price Index, which measures retail prices, stayed unchanged in August after a 0.1 percent rise in July.

The more closely watched core CPI, which strips out food and energy prices, is seen posting a 0.2 percent rise, the same gain as in July.

Cardillo said if CPI and core CPI come in worse than expected, it could take some of the wind out of the sails of a market rally, as investors worry that the Fed won't be able to take rates any lower. But he said he doesn't believe it will be enough of a concern to cause a selloff in stocks.

There could be price pressures in the pipeline as oil prices rose above the $82 a barrel mark for the first time in early trading Wednesday, after reaching a record high close for the second straight day Tuesday.

U.S. crude for October delivery rose 62 cents to $82.13 a barrel in electronic trading, ahead of the weekly report on crude inventories, due out at 10:30 a.m. ET.

There could also be price pressures from a lower dollar, which raised the cost of imports. The dollar hit a record low against the euro in early trading Wednesday, although it then rebounded into positive territory. It also gained versus the yen, as the Bank of Japan left rates there unchanged.

Also due out at 8:30 a.m. ET are readings on August housing starts and building permits, which will provide the latest view on the battered housing sector. Economists forecast both readings will fall to 12-year lows, with builders slamming the brakes on new building as they try to work through the glut of already finished new homes on the markets.

Cardillo said he doubts that the weak housing starts number will rattle investors.

"This is old news," he said. "We know housing is in recession. The Fed said as much yesterday."

In major corporate news, the CEO of mortgage lender Countrywide Financial (Charts, Fortune 500) warned Tuesday that the credit crunch threatens to impact the broader economy. But he offered an upbeat outlook for his company, saying he was "very bullish" on the future of Countrywide.

Goldman Sachs Group (Charts, Fortune 500) will not invest its own funds into its flagship Global Alpha hedge fund, according to a report in the Wall Street Journal. But the paper says that the Wall Street firm also will not close the battered fund, which has seen the value of its holdings fall by about 40 percent in the last year.

Goldman rival Morgan Stanley (Charts, Fortune 500) is due to report financial results Wednesday before the opening bell, with analysts forecasting a 12 percent drop in earnings. The report will follow an earnings report Tuesday from Lehman Brothers that showed better than expected results.

Talks continued between the United Auto Workers union and General Motors (Charts, Fortune 500) Tuesday evening, four days after the contract had expired. UAW President Ron Gettelfinger and his bargaining team sent a letter to locals Tuesday saying they may establish a firm strike deadline if the pace of talks don't pick up.

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