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Wall Street had power Friday but the energy was largely sapped from the stock market. Still, neither Friday's eerily quiet session nor more upheaval in the Treasury market prevented major stock proxies from notching solid gains this week.

For the week, the

Dow Jones Industrial Average

rose 1.4% to 9321.69, closing Friday at its highest level since June 17. The

S&P 500

gained 1.3% for the week and the

Nasdaq Composite

climbed 3.5%, rebounding from last week's shellacking.

With many traders unable to get to work or choosing to stay home, volume was extraordinarily light Friday; less than 600 million shares traded on the Big Board and under 700 million over-the-counter. Major averages kept in very narrow ranges throughout the day before ending slightly higher.

"Things seemed to go without a hitch, I didn't notice any problems on expiration," said Phil Flynn, senior market analyst with Alaron Trading, a Chicago-based futures and options brokerage. "You'd expect more volatility with the lighter volume. Considering the circumstances it went off well."

The American Stock Exchange, which lists many popular exchange-traded funds, didn't resume trading Friday until 3:45 p.m. EDT, contributing to the session's lack of movement.

Rally Interruptus

Prior to the blackout at about 4:10 p.m. EDT Thursday, stock proxies were on the upswing, albeit amid typical late-summer slowness. Meanwhile, the economic data was mainly positive and equities seemed largely insulated from the turmoil in fixed-income, although

Fannie Mae


fell 1.9% Wednesday after announcing a big swing in its duration gap, likely caused by the sharp rise in rates since mid-June.

Whether the broader stock market upturn can continue next week will depend largely on how quickly power is restored, Flynn suggested, expressing specific concerns about the impact on energy prices and tourism in New York.

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"You've seen momentum coming back into economy and this may disrupt things," he said. "How quickly will things get back to normal?"

Gasoline futures at the New York Mercantile Exchange rose above $1.01 per gallon intraday Friday, their highest level since mid-March. Gasoline settled up 2.31 cents at $0.9994 in an abbreviated trading session. The surge was largely due to the shuttering of refinery capacity because of the blackout. On the flipside, natural gas futures fell 0.9% due to the power outages.

Hit the Bricks

Overshadowed by the worst blackout in U.S. history, the big story of the week was the Treasury market's

repudiation of the

Federal Reserve

and the stock market's ability to avoid any subsequent fallout.

The Fed left rates unchanged

Tuesday, as was widely expected. But the central bank surprised most observers by declaring its intent to leave the fed funds rate at 1% for a "considerable period." A combination of a Fed seemingly intent on reviving inflation, plus signs of economic growth against the backdrop of soaring federal budget deficits sent Treasury prices reeling. The yield on the benchmark 10-year Treasury, which moves inversely to its price, closed at 4.57% Wednesday, its highest level since July 18, 2002, and rose as high as 4.66% intraday Thursday.

Treasury prices recovered late Thursday, partially in reaction to the blackout, before slipping again in Friday's abbreviated session. The 10-year settled Friday yielding 4.53%, up 25 basis points for the week. (Although trading infrastructure was fully functioning, the Bond Market Association recommended at 2 p.m. EDT close Friday, citing the inability of many traders to get to work; interest rate futures at the Chicago Mercantile Exchange closed early in conjunction.)

Treasury yields have been rising sharply since the Fed's June 25 decision to lower the fed funds rate to 1%. Minutes of that meeting released this week suggested FOMC members seriously considered a 50-basis point cut at the time but worried such as move "might be mistakenly interpreted" as a sign the Fed was done easing.

On Tuesday, the Fed reiterated concerns about "an unwelcome fall in inflation," but Treasury market participants fear the Fed's aggressive accommodation plus the Bush administration's tax cuts will revive economic growth and inflationary pressures.

The evidence this week seemed to support those concerns. The data included stronger-than-expected reports on retail sales and core producer prices, as well as the four-week moving average of jobless claims falling to its lowest level in six months. On Friday, the government said industrial production rose 0.5% in July vs. expectations of 0.2% while capacity utilization rose to 74.5% vs. June's 20-year low of 74.2%. The core Consumer Price Index rose 0.2%, vs. forecasts of a 0.1% rise, while headline CPI by 0.2%, in line with expectations. (Citing the power outages, the Economic Cycle Research Institute delayed the release of its weekly leading index while the University of Michigan postponed its report on consumer confidence.)

An unexpectedly large fall in the Empire State Manufacturing Index gave traders pause Friday, but the healthy industrial production data "justified why stocks stayed firm," Flynn said.

Mainly overlooking the tumult in Treasuries, equity investors focused on the seemingly benign combination of an accommodative Fed, which spurred the week's biggest rally on Tuesday, and the aforementioned economic data. Optimists also noted upbeat earnings news and/or guidance from firms such as




Applied Materials





. (Conversely, there were notable disappointments from







Still, many observers worry about the negative implications of rising Treasury yields. The Mortgage Bankers Association reported refinancing activity, a key element to consumer spending, fell 20% for the week ended Aug. 8. The association's index of applications for both purchases and refinancings fell by 16.3% and was down 17.6% vs. the same week a year earlier.

There's also the issue of higher yields posing competition for equities.

"The bond market is going to have an adverse effect on valuations in terms of the 'cyclical argument' of being able to live with 20-plus P/E because we're in low interest rate environment," said Brian Belski, fundamental market strategist at U.S. Bancorp Piper Jaffray in Minneapolis. "Maybe we're going to five-handle on the 10-year note -- that's what's facing the stock market."

Rising yields are "a bigger issue than most people are aware of" because the majority expected stocks to be stronger in the second half of 2003 vs. the first, Belski recalled. The surprisingly strong first half has led to widespread optimism "it's going to rally even more," he noted dismissively, calling such ebullience "a recipe for disaster."

There actually were a few disasters this week, but not in the stock market.