Dow’s 51.66 Leap Fueled by Japan Interest Rate Cut

The second half of 1991 got off to a roaring start Monday as the Dow Jones average of 30 industrial stocks zoomed 51.66 points, spurred by a cut in Japanese interest rates.

Traders said the gain was also fueled by more good news about the U.S. economy. A widely watched index of manufacturing activity, put out by the National Assn. of Purchasing Management, rose to 50.9% in June from 45.4% in May. It was the index’s first rise above 50% since May, 1990. A reading of 50% or more indicates that the economy is expanding.

The rise in the Dow to 2,958.41 marked an abrupt reversal of the slump of recent weeks when stocks fell from their all-time high of 3,035.33 attained June 3. Volume on the New York Stock Exchange on Monday was moderate at 167.6 million shares, as 1,123 stocks advanced and 464 fell.

The announcement overnight that the Bank of Japan lowered its official discount rate to 5.5% from 6% eased worries that the Japanese economy might be headed for a recession. It was the first time the rate has been lowered since February, 1987. The discount rate is the interest rate the central bank charges on loans to Japanese commercial banks.

Japanese government officials said the move to lower interest rates was meant to improve chances of sustained economic growth. The cut also calmed concerns about the soundness of the Tokyo stock market, which most recently was battered by a scandal involving Japan’s four big brokerages.

The cut touched off a rally in Tokyo, sending the Nikkei index up 817.80, or 3.5%, to 24,108.76. At midday today, the Nikkei was up another 98 points.

Lawrence A. Kudlow, economist for Bear, Stearns & Co., said the cut in the discount rate was viewed as a good thing for the U.S. economy because of Japan’s importance as a market for U.S. exports. Even though the United States routinely complains about Japanese trade barriers, Japan is nevertheless a very large export market, he noted.

“If Japan went into a recession, as Western Europe has, it could really damage the U.S. trade balance,” he said. Kudlow also said the overnight rally in Tokyo stocks led to a rally here because “the U.S. market prefers to see a stable Japanese stock market in contrast to a free fall.”

A number of traders and analysts, however, said Monday’s rise in the Dow was also a reaction to the market being in an “oversold” condition after the drop-off in recent weeks.

Ken Spence, director of technical analysis for Salomon Bros., said there appeared to have been a lot of bargain hunting by institutional portfolio managers.

Spence and others said it is by no means clear that the sharp rise in the Dow will turn into a sustained summer rally. Peter A. Da Puzzo, head of retail equity trading at Shearson Lehman Bros., said Monday’s rise also included a considerable amount of short-covering.

Among the market highlights:

* Transportation stocks were lifted by expectations that an improving economy will mean increased business travel and more truck and rail transportation as inventories are boosted. UAL, parent of United Air, was up 3 1/4 to 142, Union Pacific gained 1 7/8 to 85 3/8, and Delta Air rose 1 7/8 to 70 1/2.

* Basic industrial stocks rose on hopes for a faster economic recovery. Deere was up 2 1/8 to 54 1/8, Phelps Dodge gained 2 3/8 to 67 1/8, GM rose 1 1/2 to 42 1/4, and Illinois Tool Works added 1 7/8 to 64 3/4.

* Some tech stocks rebounded after their recent drubbing. Microsoft jumped 3 1/4 to 71 3/8, Novell rose 2 3/8 to 51 3/8, Adobe Systems was up 2 1/2 to 45 3/4, and Computer Sciences gained 1 3/8 to 70 1/2.

* Drug stocks rose as investors bet on good second-quarter earnings. Merck rose 3 1/8 to 119 1/4, Lilly jumped 2 to 73 7/8, and Bristol Myers was up 2 5/8 to 80 3/8. Many medical-instrument makers also jumped, including Santa Ana-based Tokos Medical, up 1 3/8 to 27 1/4.

Among other health-care stocks, however, Laguna Hills-based Community Psychiatric lost 1 1/2 to 28 1/2 in heavy trading after reporting second-quarter earnings up 12%.

In overseas trading, London’s Financial Times 100-index jumped 28.8 points to 2,443.6, following Tokyo. But in Frankfurt, the DAX index rose just 3.02 points to 1,625.20.

Credit

Bond yields rose as traders responded to the purchasing managers’ index as an important sign of economic recovery.

The Treasury’s 30-year bond fell 3/16 point, or $1.88 per $1,000 in face amount. Its yield was 8.43%, up from 8.41% late Friday.

Bond yields tend to rise on positive economic news, which lessens the chance that the Federal Reserve will lower interest rates further to stimulate the economy.

“The only way the Fed would ease further . . . would be definitive signs the economy would be going back into recession,” said Donald J. Fine, market analyst for Chase Manhattan Corp.

The federal funds rate, the interest on overnight loans between banks, was quoted at 7.5%, down from 8% late Friday.

Currency

The dollar rose sharply after the Bank of Japan lowered that country’s discount rate.

Traders bet that lower Japanese interest rates, at a time of stable or rising U.S. interest rates, will bring more money flowing to U.S. bonds and other investments, boosting the dollar.

The dollar soared to 1.828 German marks in New York, up from 1.811 late Friday. The dollar also jumped to 138.42 Japanese yen from 137.52 late Friday.

Commodities

On New York’s Comex, gold was 20 cents lower to 10 cents higher, with July at $368.20 an ounce; silver settled 1.3 to 1.7 cents higher, with July at $4.44.

Light, sweet crude settled 9 cents to 20 cents higher with August at $20.76 a barrel on the New York Merc.

Market Roundup, D10