FINANCIAL MARKETS : Dow Leaps 39.65; News on Inflation Pace Cited
Stock prices bounded to their highest levels in nearly 22 months Wednesday after news of an unexpectedly slim rise in June inflation rekindled the market’s rally.
The Dow Jones industrial index closed up 39.65 points at 2,584.41, its highest finish since Oct. 5, 1987. On that day, two weeks before the stock market’s crash, the Dow closed at 2,640.18.
Advancing issues outnumbered declines by more than 2 to 1 in nationwide trading of New York Stock Exchange-listed stocks.
Volume on the floor of the Big Board reached 215.74 million shares, up from 152.35 million Tuesday and the heaviest total since 244.51 million were traded on June 16.
The market, which recorded small losses in the two prior sessions, surged on news of a 0.2% rise in the consumer price index for June, the smallest increase in 16 months.
“The data produced a big sigh of relief in the market,” said Abby Cohen at Drexel Burnham Lambert.
The Labor Department report revived the market’s flagging expectations that the Federal Reserve will move to nudge interest rates lower to prevent the economy from slowing too rapidly.
The stock market, after gaining about 15% in value in the first half of the year, began the second half with nine straight gains in July as investors looked forward to easier credit. But the rally lost momentum in the first two sessions of the week as investors worried that the Fed may hold off from lowering interest rates.
“The CPI figure gave investors confidence that the Fed is going to be able to ease a little further,” said Thom Brown, managing director at Rutherford, Brown & Catherwood.
“We’ve got an awful lot of takeover activity in the airlines, hotels, drugs. The enthusiasm is being generated by the takeover names,” a trader said.
Stocks also benefited from good quarterly performances by big companies despite a slowing economy.
“While not enough companies have reported to say for sure, the anecdotal evidence is that a lot of companies did well in the quarter,” Cohen said.
General Electric led the blue chips higher after reporting stronger earnings. GE finished up 2 at 56 1/4.
Philip Morris, which reported sharply higher earnings for the second quarter, climbed 3 to 147.
Other gainers among the blue chips included American Telephone & Telegraph, up 3/8 at 36 7/8; Exxon, up 7/8 at 46 1/8; McDonald’s, up 3/4 at 30 3/4, and Procter & Gamble, up 3 1/8 to 117 1/8.
Pollution-control and waste-management stocks were especially strong, benefiting from recent bullish views on Wall Street about the outlook for environmental cleanup and protection efforts. Waste Management picked up 2 3/8 to 57 7/8; Browning-Ferris Industries gained 1 3/4 to 38 7/8, and Rollins Environmental advanced 3/4 to 11 1/8.
Tandem Computers gained 1 5/8 to 19 1/2 in active trading. The company reported sharply higher earnings for its latest fiscal quarter.
On the downside, McDonnell Douglas dropped 5 3/8 to 72 as the company posted a $48-million loss for the second quarter.
Snap-On Tools, which reported a lower second-quarter profit, took a 3 5/8-point tumble to 36.
Prices on the Tokyo Stock Exchange ended higher in light trading, ending a streak of five consecutive declines. The Nikkei 225-share index, which lost 112.49 points on Tuesday, gained 213.44 to 33,557.17.
In London, share prices ended at a new post-crash closing high, buoyed by a renewal of takeover speculation and a strong rally on Wall Street. The Financial Times 100-share average climbed 19.4 points to close at 2,292.5.
Credit
The upbeat news about inflation and strength in the dollar moved bond prices higher in light trading.
The Treasury’s bellwether 30-year bond advanced 23/32 point, or about $7.18 per $1,000 in face amount. The yield on the bond, which moves inversely to its price, declined to 8.13% from 8.19% late Tuesday.
The credit markets, which tend to advance on reports of slowing inflation, rallied after the CPI report was released. Robert Brusca, chief economist with Nikko Securities International Inc., said the market was heartened by a slowing in what is called core inflation, which excludes price changes in the volatile energy and food categories.
Traders believe that the Federal Reserve is more likely to relax credit--allowing interest rates to fall in the process--when inflation is moderating.
But prices suffered a setback in mid-morning when the Commerce Department issued its June housing start report, Brusca said.
The department said housing construction picked up 7% last month, an indication of economic strength that traders believed could make the Fed think twice about loosening credit.
Bond prices came back as the dollar rose against most major foreign currencies, Brusca said. A higher dollar makes U.S. investments, including government bonds, more attractive to investors.
The federal funds rate, the interest on overnight loans between banks, traded at 9.188%, unchanged from late Tuesday.
Currency
The dollar gained ground against most major foreign currencies in an unusual reaction to the inflation news that ordinarily might have dampened enthusiasm for dollar buying.
Immediately after the Labor Department released the consumer price index report, currency dealers sold dollars.
The initial dollar selling was based on the thinking that moderating inflation could increase the chances for the Federal Reserve Board to loosen its credit policies further and drive down U.S. interest rates.
But the dollar sales soon abated.
John McCarthy, chief currency dealer at the Amsterdam Rotterdam Bank’s New York office, said renewed demand for dollars emerged when it became apparent that the sellers lacked enough conviction to push the dollar below thresholds considered technically important.
Plus, the dollar benefited from the stock and bond market rallies, which indicated that demand for dollar-denominated investments remains robust despite the possibility of lower U.S. interest rates.
In Tokyo, the dollar closed at 141.80 Japanese yen, down from 142.35 yen. In London, the dollar traded higher at 141.90 yen. Later, in New York, the dollar closed at 142.50 yen, up from 141.50 on Tuesday.
The British pound weakened against the dollar. Strikes by British labor unions recently have discouraged investor interest in sterling. One pound cost $1.6195 late in London, cheaper for buyers than late Tuesday’s level of $1.6255. Sterling fetched $1.6127 late in New York’s day, compared to Tuesday’s $1.6235.
Commodities
Gold futures prices slumped to their lowest levels in a month as investors dumped precious metals and snapped up stocks following the release of the consumer price report.
On other markets, stock-index futures soared, energy futures plunged, grains and soybeans advanced and livestock and meat futures were mixed.
Gold settled $4.30 to $4.90 lower on New York’s Commodity Exchange, with the contract for delivery in August at $369.30 an ounce and the spot July contract at $368.30. It was gold’s lowest close since June 16, when the August contract settled at $368.80.
The Labor Department report prompted an immediate dip in the gold market and primed it for a big drop when the dollar rallied in afternoon trading.
Stock-index futures approached an all-time high on the Chicago Mercantile Exchange as program trading and arbitrage boosted both stock and futures prices.
The contract for September delivery of stocks tracked by the Standard & Poor’s 500 index settled 3.7 points higher at 338.25. The September contract traded as high as 339, just 0.45 point below the all-time high for a near-month contract.
Gasoline futures prices tumbled on the New York Mercantile Exchange, dragging down crude prices, after a report showed a steep rise in gasoline inventories.
The American Petroleum Institute weekly report, released after the close of trading Tuesday, showed total motor gasoline stocks rose 5.2 million barrels to 222.855 million barrels in the week ended July 14. Heating oil stocks rose by 5.4 million barrels to 110.2 million during the week.
West Texas Intermediate crude oil settled 9 cents to 49 cents lower, with August at $19.85 a barrel.
Grain and soybean futures finished moderately higher on the Chicago Board of Trade as rainy weather moved out of the Corn Belt and talk turned to expectations of stronger foreign demand for grain.
Soybeans for July delivery finished sharply higher but analysts dismissed the rally, saying it represented limited buying in a thin market ahead of the July contract’s expiration today.
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