Stocks Break Out of Funk

The market rises as bond yields stabilize and crude oil plunges.
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Updated from 4:12 p.m. EDT

Bond yields finally stopped rising Friday and oil prices tumbled, giving stocks in New York an opportunity to come out of their three-day slump.

The

Dow Jones Industrial Average

jumped 157.66 points, or 1.2%, to 13,424.39, and the

S&P 500

added 16.95 points, or 1.1%, at 1507.67. The

Nasdaq

was higher by 32.16 points, or 1.3%, at 2573.54.

That marked quite a turnaround from the prior three sessions, when the Dow gave away roughly 400 points, including a decline of 198.94 points, or 1.5%, to 13,266.73 on Thursday. The S&P fell 49 points since Tuesday, and the Nasdaq dropped 77 points over the same span.

Largely responsible for the recent selloff were traders resetting their expectations about inflation and interest rates.

The yield on the 10-year Treasury was lately at 5.11%, as the price for the note ticked ahead 5/32. Earlier, the yield hit 5.24%, its highest level in five years. The 30-year bond was better by 6/32 in price, well off its nadir, and yielding 5.22%.

As fixed-income securities saw their downturn halt, equities gathered upside momentum. Also aiding the recovery was a plunge of $2.17 in crude futures to $64.76 a barrel.

However, even with the bounceback to end the week, yields will likely remain in focus for the foreseeable future.

Pimco's Bill Gross, one of the most influential bond market observers on the planet, now believes the 10-year could climb all the way to 6.5% sometime in the next five years. Previously, he had seen 5.5% as the most likely top.

Central banks worldwide have been tightening rates in their effort to keep prices stable. This week alone, the European Central Bank and policymakers in New Zealand have hiked. The

Federal Reserve

in the U.S. has kept its fed funds target at 5.25% since last June.

When 2007 began, many investors were looking for at least one Fed easing this year, but the hopes of such a move have been gradually fading.

While the domestic housing sector has been soft, most other areas of the economy have remained at least somewhat solid. As a result, the Fed has repeatedly indicated that it's more concerned about the outlook for inflation than it is for a slowdown.

Now, fed funds futures are pricing in odds above 40% that officials will actually lift rates by a quarter point before 2008 arrives, whereas last month they carried a 0% chance.

Bloomberg

reported that the experts it polled believe the U.S. economy will grow at a 2.6% annual pace in the current second quarter, up from the consensus forecast of 2.2% in May. Growth should then accelerate to 2.9% by the last quarter of the year, the survey revealed.

Meanwhile, Chicago Fed President Michael Moskow, who's retiring in August, remarked before the open that the recent move in rates hasn't affected his economic outlook. He said during a televised interview that "inflation expectations are well-contained," but he suggested the Fed will remain on guard about excessive price increases.

On the economic calendar, the lone report showed a narrower trade gap than analysts had been expecting. The government said the April deficit fell more than 6% from March to $58.5 billion. Estimates had been for a gap of around $63.5 billion.

Among companies in the news,

Tyco

(TYC)

said it would split into three separate publicly traded firms, spinning off its health care and electronics operations to stockholders. Shares of Tyco gained 3.6%.

McDonald's

(MCD) - Get Report

posted global same-store sales that rose 8.7% in May, and it also got an upgrade from Deutsche Bank to buy from hold. The stock, a component of the Dow, advanced 2.4%.

Elsewhere on the research front, Bank of America downgraded

Nike

(NKE) - Get Report

and

Foot Locker

(FL) - Get Report

to neutral from buy.

JMP Securities lifted its rating on

Broadcom

(BRCM)

, and Deutsche took

Genentech

(DNA)

to a buy from a hold.

National Semiconductor

(NSM)

gained 14.7%, leading other chips stocks higher, following its latest quarterly results and outlook. National predicted after the last close that sales for the current quarter could be above Wall Street's targets.

Texas Instruments

(TXN) - Get Report

rose 4.6%, and

STMicroelectronics

(STM) - Get Report

tacked on 2.5%.