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Wall Street Gets a Shot of Confidence

The stock market's got some of its swagger back.

Flush with a new infusion of confidence, investors will carry that into Wednesday. Before the opening bell on Wall Street, we'll get a look at consumer inflation data, August housing starts and another big broker's earnings.

But there certainly should be some afterglow from Tuesday's Fed-fired rally cooked into the start of trading.

First Cut in 4 Years

The Fed Tuesday gave markets quite a jolt with its surprise, half-point cut to its target Fed funds rate. It trimmed the rate to 4.75%. It also chopped another 0.50% from the discount rate, its short-term lending rate to banks. U.S. banks within hours were announcing cuts to their prime lending rates, the rates that directly impact consumer borrowing.

But also important will be what happens to the London interbank offered rate. CNBC senior economic correspondent Steve Liesman said it will be interesting to see how much LIBOR moves relative to the discount rate.

"If that starts adjusting, we'll be beginning to work our way out of (the credit mess) it," he said.

Records All Round

Financial and commodities markets all rallied around the Fed. Gold hit a 25-year high, stocks had a historic move, and the yield curve steepened. The U.S. dollar though was a loser.

Scott Wapner was at the New York Stock Exchange, and he said the rate cut caught a lot of traders off guard. "Most people down here have a pretty good sense of what's going to happen. Today was such a surprise. People were stunned," said Wapner.


The Dow, already up strongly on the day, rocketed when the Fed rate news came across. The 335.97 point, or 1.5% move is its biggest point gain since Oct. 15, 2002 and biggest percent gain since April, 2003. The Nasdaq roared 2.7% to 2651, and the S&P 500 rose 2.9% to 1519. The Dow is now just 261 points from its all-time high and is up 10% year-to-date.

"You had like a five days rally today," said CNBC's Larry Kudlow. "We'll challenge the old highs. I think this is a great Fed move." (Remember Kudlow called for a "shock and awe" dramatic, 50 basis point rate cut, and he got it)

But he cautions: "We know there are credit event risks out there than nobody can predict."

Steepening Curve

Two-year Treasurys added 5/32 points, taking the yield to 3.982%, while the 10-year fell 2/32, lifting its yield to 4.478%.

"I think the credit markets are reflecting a combination of a potentially weaker economy and the possibility of more easing down the road. You can see it in the two-year notes, which saw their yields drop aggressively today," said CNBC's Rick Santelli. "And on the other end of the curve, the 30-year bond is acting like a lone vigilante in the inflation war and its yield is moving higher. This steepening action should continue.".

Boiling Oil

Oil hit yet another record, finishing Tuesday at $81.51. While oil prices are up 34% since the beginning of the year, Dow Jones says this number is still 20% away from the inflation-adjusted record close of $101.57, in April 1980.

Gasoline yesterday rose 0.8% to $2.0603 per gallon. It is up 29% year-to-date.

Inventory data could be a big driver in energy markets Wednesday. Any surprise tightening in supply will just be more fuel for the runup.

Econorama

More important than any data this week are the earnings reports from the brokerage industry. Morgan Stanley reports earnings Wednesday ahead of the start of New York trading. Lehman Brothers Tuesday took a hit from its mortgage business but reported profits that beat analysts expectations. Morgan Stanley is expected to earn $1.53 per share. The firm holds a conference call at 11 a.m.

"You have Morgan Stanley tomorrow morning so whatever they say it could potentially derail what they did today," said Bear Stearns trader Bill Nichols. "A precaution flag is that the stock market is bumping up against old highs."

CPI is expected at 8:30 a.m. New York time. Reuters reports expectations are for an unchanged CPI compared to a 0.1% rise in July. Excluding food and energy, the number is expected to rise 0.2%. Housing starts are expected at 8:30 a.m.

What Now Fed?

"This is (Fed Chairman Ben) Bernanke's coming out party. The clouds over Bernanke have been removed, and the Street has confidence in him," said Kudlow.

Liesman says beware of using past history to predict the Fed's next move.

"This is a Bernanke Fed. Don't price in a Greenspan future of rate cuts. Today's statement purposefully, I think, did not telegraph future cuts. In fact, it specifically said they were trying to get ahead of the curve so now we need to know just how far ahead they think they are," he said.

CNBC's Jim Cramer, a very vocal advocate for a Fed cut, ceremoniously dumped the buzzer he pushed on his show that blasted the Fed with: "they know nothing. they know nothing" Now, "They know something," he says.

Cramer says the bull is back. "The shorts will not only be squeezed. They'll be bent, spindled and mutilated," he said on Mad Money.

By the way, countdown to the next Fed decision started today. Put Oct. 31 on your calendar.

Questions? Comments? marketinsider@cnbc.com

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • CNBC's Senior Personal Finance Correspondent

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.