STOCKS : Outlook for Rate Cut Improves; Dow Up 20.8
Blue chip stocks chalked up their best gain in more than two weeks Thursday, buoyed by expectations that a moderate inflation climate will prompt the Federal Reserve to lower interest rates in a bid to sustain the economic recovery.
The Dow Jones industrial average rose 20.80 to close at 3,007.83. In the broader market, advancing stocks led decliners 951 to 600 on moderately active New York Stock Exchange volume of 160.42 million shares, up from Thursday’s 140.09.
The government reported Thursday that the producer price index rose a modest 0.2% in August. That sent bond yields plummeting on the belief that the Federal Reserve now has more leeway to ease interest rates further.
“I see that a lot of people are still anticipating a Fed ease,” said Jon Groveman at Ladenburg Thalmann. “Today we got a strong bond market to justify the technical rebound (in stocks).”
Ken Ducey, director of trading at BT Brokerage, said that the subdued inflation scenario builds a stronger case for lower rates.
Jack Solomon, analyst at Bear Stearns, said the stock market also drew encouragement from the recent strong performance of blue chips such as IBM, which advanced 2 5/8 to 104. “Big Blue is getting some color back,” he said.
“Seasonally, it’s a market governed by the next (economic) report,” he said. “If we get the lower rates, it’s one step behind us, and it’s going to be a plus.”
Among the market highlights:
* The drop in bond yields provided a special spark for mortgage-finance and credit company stocks. Federal Home Loan Mortgage rose 4 1/2 to 95 7/8; Federal National Mortgage gained 2 5/8 to 61 1/8; Beneficial Corp. rose 3/4 to 61, and Household International added 1 3/4 to 58 1/2.
* AT&T; rose 7/8 to 38 1/4. It was on the NYSE most active list after First Boston repeated a “buy” rating and raised its 1992 estimate.
Other blue chips contributing to the Dow index’s gain included GM, up 3/4 at 36 1/2; Sears, up 1 3/8 at 40 1/4; Philip Morris, up 1 1/8 at 74, and Merck, up 1/2 at 130 3/4.
* HMO stocks continued to rebound. U.S. Healthcare jumped 3 5/8 to 27 1/4. First Boston raised its rating on the company, and other analysts made positive comments after Healthcare received the 16% rate hike it requested from New Jersey regulators. United Healthcare surged 4 1/8 to 49 1/8.
* Biotech stocks, one of the strongest groups of late, also surged anew. Amgen rose 2 3/8 to 58, Centocor leaped 5 3/4 to 52 1/2, and Biogen advanced 3 5/8 to 36 1/4.
* Among Southland issues, personal products firm DEP Corp. rose 1/8 to 13 1/2 on a strong earnings gain. L.A. Gear added 1/2 to 12 as its capital infusion from Trefoil Capital became official.
Supermarket chain Vons bounced back 1/2 to 26 3/4 after the company said it is comfortable with analysts’ per-share earnings estimates of 40 to 44 cents this quarter. The company said its margins continue to hold up, despite Wall Street worries about a price war among chains in the region.
Overseas, London’s Financial Times 100-share average closed 15.3 points higher at 2,641.9. In Frankfurt, the 30-share DAX average ended 3.13 points higher at 1,631.32. Stocks ended little changed in Tokyo, with the 225-share Nikkei average finishing up 25.41 at 22,530.20.
Credit
Prices of long-term Treasuries shot up as the 30-year bond yield tumbled to a 20-month low, jolted by fresh hopes that the Federal Reserve would ease interest rates.
The price of the Treasury’s bellwether 30-year bond leaped 1 1/32 point, or $10.31 per $1,000 in face amount. Its yield slumped to 7.92% from 8.01% late Wednesday. It was the long bond’s lowest closing yield since it hit 7.88% on Dec. 22, 1989.
Long-term bonds initially jumped after the release of the government’s producer’s price index report showing that inflation was under control, but the entire market shot up later in the day as the government reported that the nation’s money supply had slumped for the second month in a row in August.
Traders interpreted the combination of low inflation and reduced monetary activity as a compelling argument for the central bank to lower short-term interest rates to stimulate the economy, a move that benefits the value of bonds.
The federal funds rate, the interest on overnight loans between banks, was quoted at 5.438%, unchanged from late Wednesday.
In the tax-exempt market, the Bond Buyer index of 40 actively traded municipal bonds closed at 94 3/16, up 3/16 point from late Wednesday. The average yield to maturity fell to 6.94% from late Wednesday’s 6.96%.
It was the highest Bond Buyer level since the index hit 94 7/16 on August, 1989, and the lowest yield since the Bond Buyer began calculating yields in 1985.
Currency
The dollar fell in another round of technical trading amid lower interest rate hopes.
Jay Tucker, a currency trader at First Boston Corp., said the dollar’s demise came amid speculative trading before the August retail sales report, scheduled for release today. Market analysts say the report could show the strength of the economy’s recovery.
Traders began selling dollars late Wednesday in New York and the trend continued in Europe, dealers said. Expectations of lower interest rates have depressed the dollar in recent sessions. A cut in interest rates would reduce the dollar’s value to foreign investors.
In New York, the dollar fell to 1.686 German marks from 1.689 Wednesday and to 134.08 Japanese yen from 134.65. The British pound cost $1.7325, less expensive than $1.7345 late Wednesday.
Commodities
The prospect of food shipments to the Soviet Union and the threat of a diminished crop in the United States sent the prices of grain and soybean futures higher Thursday on the Chicago Board of Trade.
After the close of trading, however, the Agriculture Department released new data estimating that the harvest of major crops would be about what had been expected.
Although there were no public developments in arranging for food shipments to the Soviets, the market sustained the belief such aid was inevitable.
Traders said there are indications that the United States may be planning direct help for the Soviets, rather than merely extending credit guarantees.
The market’s expectations for a bullish crop report were fulfilled in only a minor way.
“I don’t see anyone enthusiastic about it either way,” said Dan Cekander, an analyst in Chicago with Rodman & Renshaw Inc.
The USDA estimated farmers will harvest 1.817 billion bushels of soybeans, only slightly below the market projection; 7.295 billion bushels of corn, slightly above what the market was expecting; and 2.013 billion bushels of wheat, a little below the USDA’s Aug. 1 estimate.
The government also estimated lower-than-expected stocks of the three crops left after the 1991-92 year.
“These are not the catastrophically small numbers that some had feared,” said Doug Jackson, an analyst in Des Moines, Iowa, with Farmers Commodities Corp. “But they still show us reduced carryouts, with wheat and corn relatively tighter than beans.”
On the Board of Trade, wheat for delivery in September settled 3.75 cents higher at $3.225 a bushel; September corn was 3.75 cents higher at $2.518 a bushel; September oats were 1.25 cents higher at $1.215 a bushel, and September soybeans were 6.50 cents higher at $5.893 a bushel.
Energy futures were lower in featureless trading on the New York Mercantile Exchange, with light, sweet crude oil for delivery in October losing 11 cents to settle at $21.53 a barrel.
On the Commodity Exchange in New York, gold for delivery in December was $1.20 lower at $348.20 an ounce; December silver was 1 cent higher at $4.008 an ounce.
