Dow Reacts to Mideast, Drops 54.95 : Index Off 120 Early in Session; Volume Hits High for Year

Stocks closed sharply lower today although they managed to rebound as bargain hunters were encouraged by signs the Middle East conflict may be easing.

The Dow Jones average of 30 industrials, after being down 120 points at its midsession low, closed with a 54.95-point loss at 2,809.65.

Declining issues outnumbered advances by a one-sided margin on the New York Stock Exchange.

Big Board volume reached a 1990 high of 292.36 million shares, against 253.09 million in the previous session.

The NYSE’s composite index fell 3.53 to 188.83.

The market snapped back from depressed levels on a statement by Soviet Foreign Minister Eduard A. Shevardnadze that Iraq had assured Moscow it would withdraw from Kuwait soon.

However, the mood on Wall Street remained bearish, with traders viewing the price explosion on world oil markets and a government report showing unemployment at the highest level in two years as threatening serious inflation.

The Labor Department reported this morning that nonfarm payroll employment fell by 219,000 in July, surprising analysts who had been looking for a modest increase.

The civilian unemployment rate jumped 3/10ths of a percentage point, to 5.5%.

Those figures reinforced concern in the financial world that economic activity was weakening more than had been thought just a few weeks ago.

Many observers fear the economy’s problems could be compounded by a jump in oil prices arising from Iraq’s invasion of Kuwait this week.

Selling intensified as reports reached Wall Street that Iraqi forces were near the border of Saudi Arabia. It subsequently let up a bit when a Soviet official said Iraq was expected to withdraw from Kuwait in the near future.

Short-term interest rates tumbled and some bond prices bobbed up this morning as traders temporarily ignored the inflationary implications of a possibly prolonged oil price spiral.

Rates on short-term government bills registered the most reaction to a Labor Department report showing the nation’s unemployment rate shot up to 5.5% in July from 5.2% in June.

The widely awaited report was viewed as an indication that the struggling economy may be slipping into recession. Last month’s jobless rate was the highest since it hit 5.6% in August, 1988.

The sharp increase largely reflected the economy’s loss of 219,000 jobs. Though about 160,000 of those Americans who lost jobs were temporary census workers laid off by the government, private industry payrolls also lost 45,000 jobs, the report said.

Bond market analysts regarded the interest rate improvements today as unsustainable.

Carl F. Napolitano of R. C. Government Securities Inc. said the spike in oil prices sparked by Iraq’s invasion of Kuwait has reduced the chances that the Federal Reserve soon will relax its monetary policy.

He said the unfolding crisis in the Middle East, widely expected to drive oil prices higher around the world and fuel inflation, will outweigh concerns about the faltering economy and make the Fed reluctant to ease.

The danger would be that the central bank might fan inflation by engineering lower interest rates. Fighting inflation is the Fed’s chief mission.

Intermediate and long-term government bond prices continued to slump this morning, reflecting pessimism about the possibility of a shift to a more generous credit policy.

The Treasury’s bellwether 30-year bond skidded nearly 1/2 point, or $5 per $1,000 in face value, on top of Thursday’s loss of 1 7/32 points. Its yield, which rises when the bond’s price falls, rose to 8.50% from 8.45% late Thursday.

But prices of short-term governments added 7/32 point to 1/8 point while intermediate maturities ranged from up 9/32 point to down 9/32 point. Long-term issues were 13/32 point to 1/2 point higher, according to Telerate Inc., a financial information service.

The movement of a point is equivalent to a change of $10 in the price of a bond with a $1,000 face value.

The Shearson Lehman Hutton daily Treasury bond index, which measures price movements on all outstanding Treasury issues with maturities of a year or longer, regained 0.36 to 1,167.73 by late morning. It lost 4.99 points in Thursday’s selloff.

Yields on three-month Treasury bills dropped to 7.52% as the discount plunged 13 basis points to 7.29%. Yields on six-month bills fell to 7.52% as the discount receded 14 basis points to 7.16%. Yields on one-year bills pulled back to 7.53% as the discount decreased 16 basis points to 7.04%.