NEW YORK (CBS.MW) -- The futures markets spiked following news that the economy grew in the fourth quarter. This startled economists, who had expected another contraction like the one witnessed in the third quarter.
Propelled by a 9.2 percent jump in government spending, the advance reading on gross domestic product showed a 0.2 percent increase vs. the expected 1.2-percent decline. The economy contracted at a 1.3 percent rate in the third quarter.
The climb in government spending was attributable to the spike in defense purchases. Consumer spending, meanwhile, rose 5.4 percent in the fourth quarter, mostly due to the surge in auto sales. Investment spending fell 12.8 percent while businesses slashed a record $120.6 billion in inventories.
March S&P 500 futures climbed 4.10 points, or 0.4 percent, and were trading 3.40 points above fair value, according to HL Camp & Co. And Nasdaq futures gained 10.00 points, or 0.7 percent, and were trading around 17.30 points above fair value.
Markets got mauled on Tuesday, pushing the Dow industrials to a two-and-a-half-month low.
In the meantime, the fed's two-day policy-setting meeting will produce a decision at around 2:15 p.m. Wednesday afternoon.
The majority of economists expect the level of the overnight fed funds rate to remain unchanged at 1.75 percent following 11 aggressive rate cuts in 2001 that shaved it by 4.75 percent. See Fed preview story.
Among shares trading in the pre-open, AOL Time Warner (NYSE: AOL - news) edged up10 cents to $26.80 in Instinet. The Internet and media colossus checked in with fourth-quarter cash earnings that matched analysts' expectations. Going forward, AOL said it expects revenue to remain flat in the current quarter vs. last year and to increase 8 to 12 percent in 2002.
Dow stock AT&T (NYSE: T - news) posted a fourth-quarter profit from operations that modestly surpassed the Wall Street consensus estimate. Looking ahead, the company projected a "slight acceleration" in the rate of revenue decline for the first quarter on a sequential basis. AT&T also said that it plans to issue an AT&T Consumer tracking stock later in the year.
Treasurys dip
Government bond prices soured after the stronger-than-expected GDP was released. Prices rallied furiously on Tuesday as stocks nose-dived.
Investors also assessed President Bush's State of the Union address.
Bush urged Congress to push through a fiscal stimulus package to jump-start the stagnant U.S. economy. He said the government would run a small and short-term deficit as long as Congress restrains spending and acts in a fiscally responsible way. Read related story.
In recent dealings, the 10-year Treasury note was off 14/32 to yield 5.00 percent while the 30-year government bond erased 13/32 to yield 5.415 percent.
In the currency sector, the dollar dropped 0.4 percent to 132.90 yen while the euro erased 0.5 percent to 86.08 cents.
The dollar weakened against the yen following a Wall Street Journal article revealing that General Motors complained about the Japanese currency's weakness to Treasury Secretary Paul O'Neill. A weak yen makes Japanese exports more competitive on U.S. markets.
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