Brokerage stocks surged Friday, outpacing other financials after the release of government data indicating that the economy is slowing.

The slowdown makes further interest rate hikes less likely. The rally came even though analysts predict weaker second-quarter profit growth for the brokerage sector.

Investors are buying these stocks because they have been beaten down quite a bit "and the interest rate environment is improving," said Michael Freudenstein, an analyst at J.P. Morgan Securities.

Shares of Merrill Lynch & Co. rose $4, or 3.85%, to $108; Morgan Stanley, Dean Witter & Co. $7.3125, or 9.72%, to $82.5625; and Lehman Brothers Inc. $8.3125, or 10.18%, to $89.9375.

Paine Webber Group Inc. surged $2.1875, or 4.65%, to $49.1875, a 52-week high. The only two brokerage firms that did not participate in the rally were Morgan Keegan Inc., a regional brokerage in Memphis, and Friedman Billings Ramsey & Co., a regional firm in Arlington, Va.

Brokerages outperformed banks, which also rallied on the favorable economic data. The American Banker index of the 50 largest banks rose 4.48%, while its index of 225 banks rose 5.92%.

Investors were reacting to a Labor Department report that new jobs and wages rose less than expected in May. The unemployment report also said the number of non-government jobs fell for the first time in more than four years.

The report suggested that the Federal Reserve, which has been trying to slow the turbocharged economy by raising interest rates, could now take a less aggressive stance. The Fed has raised rates six times since last summer. During its last meeting it raised them by 50 basis points compared to 25 the other times.

Shares of brokerages, like other financials, have been in the dumps ever since the Fed began raising rates. Higher rates increase borrowing costs for companies and reduce the amount investors are willing to pay for a share of a financial company's future earnings.

Brokerage stocks have been depressed because trading volumes, initial public offerings, mergers and acquisitions, and other capital market activities have declined in the second quarter, said Mr. Freudenstein.

So far this year, $747.4 billion of U.S. mergers and acquisitions have been announced, well off the pace needed to match $1.7 trillion in 1999 and $1.6 trillion in 1998, according to Securities Data/Thomson Financial Corp.

Announced European merger-and-acquisition volume so far this year totals $508.9 billion, off from $1.2 trillion in 1999, though on a pace to beat the 1998 volume of $595.4 billion.

Initial public offerings in the U.S. market so far this year have reached $41.5 billion, compared to $68.8 billion for 1999, and $36.8 billion for 1998, according to Securities Data.

Michael Flanagan, analyst at Financial Service Analytics, said the volatile technology sector took the wind out of underwriting sales in the second quarter for many securities firms, "but investors are looking past the second quarter," he said. "Underwriting sales could quickly rebound in the third quarter, given the leveling-off of interest rates. There still remains a lot of pent-up underwriting demand."

Question marks continue for the industry, Mr. Freudenstein added. "We are in summer, where there is little activity and in November there will be an election, which might disrupt trading volume," he said. "There will be more questions than answers in the next couple of months for the group."

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