That's a very common problem. I've heard LBS bikes have this problem too, but their assemblers open up the BB and wheel axles to add grease. (Three times I've found metal shavings in the department-store bikes' BBs. I suppose it's just from the tapping process. But, it's unnerving to see that.).

You should open your axles and grease them too.

To be honest, I'm not sure that yellow stuff is grease. 3 out of 4 times it felt and smelled like Cosmoline. That's a metal preservative used to protect things like gun barrels when packed for long-term storage. I cleaned my axles and BBs, and then greased.

Regarding the knock, make sure your pedals are tight. I hand-tightened mine on my first bike thinking they would tighten as I rode. I ended up with a knock 300 miles later. It was a tap I could feel in my foot. I thought it was the BB. The knock went away, I suppose because I inadvertently finger tightened my pedals during the process. 300 miles later I got the knock again. I spent more time investigating and realized the pedal was 2-3 threads loose.

The other thing I strongly recommend with department-store bikes is to use emory cloth (plumbing department) or a polishing stone to remove any burrs inside the wheel. Sometimes these bikes have some sharp seems and rough edges around the spoke holes. It's a common complaint among DSB buyers, "I rode it 3 miles and it flatted. I replaced the tube and it happened again."

I replace the rubber liner with Velox too. Doing that reduces the need to smooth down the spoke holes. But, I smooth them anyway. I think the big thing is the seam. Those can be abrasive.

At my local Walmart I saw a bike which had been returned, and was on the floor discounted, sold "as is." I was curious if it had single-wall rims so I let the air out. When I pulled the tire to the side, I could see the rubber liner was shifted far to the side exposing spoke holes. That made me wonder if it was returned due to mysterious flats. (Another example of how poor quality, assembly and unsophisticated buyers create a vicious cycle to give potentially decent bikes a bad reputation.).