Falling Oil Prices Boost Stocks After Volatile Week

The rally extended to the financial services sector, despite a dismal earnings report from mortgage giant Fannie Mae. Its stock fell 9 percent in trading yesterday. Freddie Mac closed virtually unchanged at $5.90, up 1 cent, after reporting Thursday that losses from foreclosures and other failed home loans nearly doubled during the second quarter.

But other firms in the financial sector continued a rebound. Lehman Brothers gained 5.4 percent and Merrill Lynch was up 2.9 percent. "I am a little surprised that this rally has persisted as much as it has," said Sean Ryan, a banking analyst at Sterne Agee in New York.

And analysts are predicting more bad news as unemployment rates increase and the retail sector struggles with declining consumer spending. "Banks are only starting to work through their housing problems," Ryan said.

Yesterday's rebound could be wiped out by a drumbeat of negative economic news next week, when retail sales figures and industrial production figures are scheduled to be released. "These are not going to be drastic declines, but declines nonetheless," said Bethune from Global Insight. "That is not a good start to the third quarter."

Meanwhile, the Labor Department reported yesterday that worker productivity, measured by an employee's hourly output, rose 2.2 percent in the second quarter. That was slower than in the first quarter, when it rose 2.6 percent. Economists had expected a 2.5 percent increase as layoffs forced the remaining workers to do more, according to a Bloomberg survey.

But the 2.2 percent increase is a healthy rate that should help ease pressures on the Federal Reserve to increase interest rates, analysts said. "Strong productivity growth should mean that inflation would abate and the Fed would be able to leave interest rates alone" as the year progresses, said Peter Morici, professor at the University of Maryland business school.

The Labor Department also revised its first-quarter productivity growth estimates for non-financial corporations from 4.6 percent to 1 percent. That could indicate that the increase in productivity levels may not continue indefinitely, analysts said. "If you keep cutting hours and the economy doesn't bounce back, falling output due to a reduction in demand will result in a decline in productivity," Brusuelas said. "That's the concern."

Labor costs, another indicator of inflation pressures, rose 1.3 percent during the second quarter, compared with 2.5 percent the previous quarter.