FINANCIAL MARKETS : Bonds Stage Rally; Dow Edges Down : Market Overview
* A Labor Department report pointing to continued low inflation spurred a powerful rally in the Treasury bond market, driving its key long-bond yield to its lowest level in two weeks.
* Blue chip stocks closed slightly lower, but the broader market rose as jitters about first-quarter earnings canceled out positive news on inflation and a drop in interest rates.
* The dollar sank against most major currencies, tumbling to another post-war low against the Japanese yen, in a selloff incited by the falling interest rates.
Credit
Bond traders also rushed to buy shorter-term securities after inflation news out of Washington indicated that upward pressure on producer prices, which can erode the value of fixed-income securities, was not as great as previously perceived.
“The market was set up in a way to respond like this. It was leaning too far in one direction,” said Kevin Logan, chief U.S. economist at Swiss Bank Corp.
At the close--three hours early because of the upcoming Easter weekend--the yield on the Treasury’s 30-year bond sank to 6.85% from 6.94% on Wednesday. It was the bond’s lowest yield since closing at 6.82% on March 24. Its price, which moves in the opposite direction from yield, spurted ahead by 1 1/4 points, or $12.50 per $1,000 in face value, bringing its gains for the week to more than 2 1/2 points.
In recent weeks, bond market participants have rushed to sell bonds amid heightened fears that the inflation rate was headed higher. But those fears were allayed by key data in the Labor Department’s producer price index for March.
The report showed prices charged by producers, such as farms and factories, rose 0.4% in March.
But March’s increase was driven by a 1.3% jump in energy prices and a 0.5% rise in food prices. Excluding those two volatile sectors, prices edged up just 0.1%, the smallest increase in three months in this so-called core inflation reading.
Many participants were anticipating a core rate increase of about 0.3%.
“The core rate is very low and really behaving,” said Robert Brusca, chief economist at Nikko Securities Co. International Inc. “Most of the inflation we’ve had this year was really just energy-price related.”
Apart from the inflation report, long-term Treasury securities continued to get a lift from speculation that the government might scale back its sales of 30-year bonds.
Short-term maturities were up 3/16 point to 15/32 point, and intermediates rose from 1/2 point to 11/16 point, the financial information service Telerate Inc. reported.
The federal funds rate, the interest on overnight loans between banks, held at 2.75% from late Wednesday.
Stocks
The stock market paid only scant attention to the government’s producer price index that sent bond yields plunging.
The Dow Jones average fell 0.54 point to 3,396.48, ending the abbreviated week with a gain of 25.67 points. The stock market will be closed on Good Friday. In the broader market, advancing issues outnumbered decliners by about 10 to 9 on the New York Stock Exchange. Big Board volume was 284.65 million shares, down from Wednesday’s 300 million.
“Although the PPI number was a good number, I am not overly impressed with the market’s performance over the last few sessions,” said John Conlon, market strategist at Rothschild Inc. “The good news is kind of on the table. I don’t see what the next piece of external news might be to propel the market higher.”
Conlon was concerned that many stocks are too expensive to warrant widespread buying. Furthermore, the market is worried about upcoming earnings reports after several companies warned that their first-quarter profits will be disappointing.
Those fears were stoked by Aluminum Co. of America. Late Wednesday, the company reported that its first-quarter net income fell to 31 cents a share from 64 cents a year ago, dragged down by oversupply and depressed prices. Alcoa dropped 2 to 60 3/8 after a delayed opening Thursday, and Reynolds Metals fell 1 1/8 to 44 3/8.
Among the market highlights:
* Philip Morris was off 1 to 46 1/4 after touching a new 52-week low of 45 7/8.
* Surgical staple maker U.S. Surgical became the latest high-growth stock struck down by a negative earnings forecast. It slid 15 1/8 points, or 33%, to 31 3/8.
The U.S. Surgical news hurt a host of other medical product stocks. “It carried over,” said Tom Callahan, an executive vice president at Yamaichi International, pointing to a loss of 5/8 to 23 3/4 in Abbott Laboratories and to Baxter International, which fell 1 3/8 to 27 3/8.
* Among weak blue chips besides Alcoa, Merck slipped 3/4 to 33 1/8.
* Staples lost 2 1/2 to 29 1/2 after the office equipment company said its president was resigning.
* Medtronic slumped 7 7/8 to 52 1/8 in sympathy with U.S. Surgical. C. R. Bard, which also makes medical devices, slipped 1 5/8 to 22 3/8. Cowen cut its Bard rating to hold.
* MCI Communications rose 1 1/2 to 45 3/4. PaineWebber upgraded its rating to buy from neutral.
* Genentech lost 2 1/2 to 31 1/2. Prudential cut its rating to hold from buy.
* Soft-drink stocks fell after Allan Kaplan, a Merrill Lynch beverage analyst, lowered his ratings on Coca-Cola and Pepsico. Coca-Cola finished at 39 3/4, up 1/4, but fell as low as 37 1/2 before the company said it bought back about 750,000 shares this week. Pepsico fell 5/8 to 39.
Overseas, Tokyo’s 225-share Nikkei average closed 138.04 points up at 19,967.27, a new high for the year.
On the Frankfurt bourse, the DAX 30-share average gained 5.42 points to close at 1,655.73.
In London, the Financial Times 100-share average lost 0.3 point to finish at 2,821.8.
Other Markets
Currency market watchers said dealers dumped dollars after long-term bond yields dropped. Declining U.S. interest rates reduce returns on dollar-denominated investments and tend to lower demand for dollars.
In New York, the dollar fell to 113.40 Japanese yen, down from 113.50 yen in New York late Wednesday. It was another post-war record low for the dollar against the Japanese currency.
The greenback settled at 1.607 German marks, down from 1.619. The British pound rose to $1.528 in New York, compared to $1.514 on Wednesday.
Meanwhile, in precious metals trading on the Commodity Exchange, gold fell 80 cents to $337.60 an ounce. Silver settled at $3.829 an ounce, down from $3.859 on Wednesday.
On the New York Mercantile Exchange, light, sweet crude oil for May delivery fell 15 cents to $20.22 a barrel.
