* An upbeat report on inflationary trends lifted stock prices in an active but cautious session. The Dow Jones industrial average closed up 27.28 points to 3,235.91. For the week, the average gained 14.31 points.
* Bond prices closed sharply lower after a rally prompted by an upbeat inflation report fizzled.
* The dollar ended mixed on news that the U.S. aircraft carrier America had entered the Persian Gulf to reinforce United Nations demands on Iraq.
The Dow moved up sharply after the opening bell. Analysts said the gain was a positive reaction to a Labor Department report that showed that wholesale prices gained a modest 0.2% last month. Stock prices cooled as a bond rally fizzled, but equities then rebounded in the afternoon.
Jack Solomon, vice president and market analyst for Bear, Stearns & Co., said there wasn't anything in particular that lifted stocks in the afternoon session. Buyers entered the market on the assumption that a string of positive economic reports in recent weeks, from growing payrolls, higher retail sales and lower inflation, will be enough to sustain a steady economic recovery.
Later in the day, the Commerce Department said business inventories were reduced by 0.4% in January. That is generally a sign that production could increase as the economy grows in the months ahead.
Accordingly, some of the cyclical stocks--companies whose fortunes are tied to a growing economy--showed strength.
Among the market highlights:
Companies that produce paper, metals or chemicals benefited from the rally in cyclicals. International Paper rose 1 to finish at 74 3/8; Weyerhaeuser gained 7/8 to close at 33 3/4; Alcoa added 2 1/2 to end at 69 1/8; Phelps Dodge rose 2 to a close of 81 1/4; Dow Chemical gained 7/8 to finish at 57 7/8, and DuPont added 3/8 to end at 44 1/2.
* Auto stocks were mixed after the release of the latest sales reports, with the estimated selling rate for North American-made autos 13.8% higher in early March. Ford fell 1/8 to 36 5/8; General Motors lost 5/8 at 37 1/8, and Chrysler declined 1/4 at 16 3/4.
* Litton Industries rose 1 1/8 to close at 97 after declaring a two-for-one common stock split.
* Pfizer fell 1 1/4 to end at 71 3/8 in heavy trading after the Food and Drug Administration criticized a heart valve made by the company.
* Shoemaker Stride Rite fell 3 7/8 to close at 24 in heavy trading after it predicted first-quarter earnings of 33 cents or 34 cents a share. Analysts had expected a better performance.
* Silicon Graphics lost 5/8 to close at 21 1/4 even though Cowen & Co. analyst Richard Chu told analysts to start buying the stock. The computer company Thursday said it would buy MIPS Computer Systems Inc.
* Valassis Communications, which began trading on the NYSE Thursday, was the most actively traded issue, down 1/8 at 16 5/8. Other active issues included LL&E; Royalty Trust, up 5/8 at 3 5/8; RJR Nabisco, up 1/8 at 10, and Homestake Mining, down 1 1/2 at 13 1/2. Homestake said Friday it agreed to acquire Canada's International Corona Corp. in a stock swap valued at about $432 million.
* Dayton Hudson gained 2 1/8 at 63 3/8 after enduring a drubbing the previous session, when it reported lower fourth-quarter earnings.
* IBM rose 1/2 to end at 89 5/8 after an analyst upgraded its rating for the computer king. Commonwealth Edison dropped 1 at 34 5/8 after an analyst cut her rating on the utility's future performance.
Overseas, London stocks fell, with the Financial Times 100 index losing 17.3 points to close at 2,476.0 in a three-day losing streak. That represented a fall of 57.1 points, or 2.25%, since the end of last week. In Frankfurt, the 30-share DAX index closed 5.14 points higher at 1,732.64, down 13.31 points from a week earlier.
In Tokyo, the 225-share Nikkei average was down 105.82 points, or 0.51%, to 20,456.06. The index fell 536.94 points from the end of last week.
The yield on the Treasury's bellwether 30-year bond rose to 8.06% from 8.04% Thursday. The price, which moves in the opposite direction from the bond's yield, was down 5/16 point, or $3.13 per $1,000 in face amount.
Bonds rallied in the morning after the release of the wholesale price report, but the market couldn't hold the gains, and prices slipped back to the depressed levels, where they ended the day.
Kevin Flanagan, a money market economist with Dean Witter Reynolds, said traders were still preoccupied with Thursday's retail sales data that pointed to an economic recovery. "That really spooked the market and brought a little fear out in investors that maybe the recovery could come sooner rather than later," he said.
Yields on three-month Treasury bills were up to 4.14% as the discount rose 3 basis points to 4.05%. Yields on six-month bills were up to 4.36% as the discount gained 4 basis points to 4.22%. Yields on one-year bills rose to 4.77% as the discount was up 8 basis points to 4.55%. A basis point is one-hundredth of a percentage point.
The federal funds rate, the interest on overnight loans between banks, was quoted at 3 5/8%, down from 3 15/16 Thursday.
The dollar weakened in early trading on the wholesale inflation report, but news of the U.S. naval maneuver in the Persian Gulf helped reverse the trend.
"People tend to go into dollars in time of international tension," said Jeff Link, a dealer at Harris Trust & Savings Bank.
The dollar closed unchanged at 1.6695 German marks. But it ended lower against the Japanese yen at 133.65 yen, compared to a previous close of 134.20 yen.
The British pound slid to $1.7075 from $1.7130.
The dollar was barely changed against the Swiss franc at 1.5100 francs from 1.5095 francs. It also closed at 5.6675 French francs, compared to a previous close of 5.6700 francs.
March lumber futures at the Chicago Mercantile Exchange soared a phenomenal $12.70 per thousand board feet before the contract expired Thursday, and May and July contracts posted limit gains of $5.
March closed at $272.50 and set a contract high of $275 earlier in the day. The all-time high lumber price is $287.30, set Aug. 24, 1979, according to CME records.
The shortage of lumber at dealerships plus cash gains have spurred purchases of cheaper CME lumber futures, traders said.
In other commodities, Arabica coffee futures also closed higher at the New York Coffee, Sugar & Cocoa Exchange after the head of the National Coffee Commission said Central American producers support export limits.
Heating oil futures at the New York Mercantile Exchange closed sharply higher in reaction to a blast of cold weather in the Northeast.
April gold closed 70 cents lower at $347.30 an ounce on New York's Commodity Exchange. Silver climbed 1.3 cents to $4.099 an ounce.