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-term bond yield to its lowest level in two weeks.

* Most major stock indexes closed slightly lower as jitters about first-quarter earnings canceled out the positive news from the bond market.

* The dollar sank against most currencies, tumbling to another postwar low against the yen.

Credit

The government’s report that wholesale prices rose 0.4% in March produced a stampede of buying in the bond market.

While the inflation rise was nominally a large number, the so-called core rate of inflation--excluding the volatile energy and food sectors--rose just 0.1%, the smallest increase in three months.

The news was a major relief to bond investors, who have been fearful that soaring prices of key commodities in recent months signaled a return to high inflation--which would in theory send interest rates rocketing.

Indeed, long-term interest rates had moved up significantly in recent weeks on inflation concerns. But on Thursday, buyers snapped up bonds across the board, sending yields plummeting again.

At the market close--three hours early because of the long Easter weekend--the yield on the Treasury’s 30-year bond was at 6.85%, down from 6.94% on Wednesday. It was the lowest yield since 6.82% on March 24.

The bond’s 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.

“The market was set up in a way to respond like this. It was leaning too far in one direction,” said Kevin Logan, economist at Swiss Bank, noting the March selloff in bonds.

“The core (inflation) rate is very low and really behaving,” said Robert Brusca, economist at Nikko Securities Co. “Most of the inflation we’ve had this year was really just energy-price-related.”

The government releases another inflation report today: March consumer prices. But with the market closed for Good Friday, traders can’t react until Monday.

Stocks

The market paid only scant attention to the good inflation news and plunge in bond yields.

Instead, the continuing selloff in consumer-brand stocks and new worries about industrial companies’ earnings kept sentiment depressed.

The Dow Jones industrials slipped 0.54 point to 3,396.48, after being down nearly 20 points early on. For the abbreviated week, the Dow gained 25.67 points.

Though winners slightly outnumbered losers on the New York Stock Exchange, most major indexes closed lower. Big Board volume was 284.65 million shares, down from Wednesday’s 300 million.

“Although the (inflation) 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.

Conlon is concerned that many stocks are too expensive relative to earnings to warrant widespread buying. And with first-quarter earnings looking increasingly dicey at many companies because of the slow economy, stocks are vulnerable for the next few weeks, analysts warn.

Among Thursday’s highlights:

* Earnings worries were stoked anew by aluminum giant Alcoa, which late Wednesday reported that first-quarter net income fell to 31 cents a share from 64 cents a year ago, dragged down by oversupply and depressed prices. Alcoa shares slumped 2 to 60 3/8 after a delayed opening Thursday.

Other metals stocks fell as well. Reynolds Metals lost 1 1/4 to 44 1/4, Phelps Dodge dropped 1 1/8 to 42 7/8, and Inco slipped 3/8 to 22 7/8.

* Surgical device maker U.S. Surgical plummeted 15 1/4 to 31 3/8 after it too warned of declining earnings, though it insisted that the fall would be temporary, caused by customers’ inventory changes.

The news sparked another selloff of health care stocks in general, which have been the market’s dogs for most of the last 15 months. Medtronic tumbled 6 3/4 to 53 1/4, U.S. Healthcare fell 2 to 40 1/2, Sunrise Medical dropped 2 to 20, Genentech plunged 2 1/2 to 31 1/2, Warner-Lambert lost 1 7/8 to 67 1/8, and Johnson & Johnson slid 1 1/4 to 38 1/2.

* Retail stocks were mixed as many retailers reported poor March sales because of bad weather. Gap plummeted 1 3/4 to 28, Melville lost 1 3/8 to 44 7/8, and Dayton-Hudson fell 1 5/8 to 76 3/4, but Sears added 1 1/4 to 52 3/4, and Wal-Mart bounced back 1 1/8 to 28 7/8.

Also, office supply retailer Staples tumbled 2 1/2 to 29 1/2 after saying its president is resigning.

* The drop in consumer-brand stocks continued for a fourth day, on fears of widespread discounting if consumer spending stays weak.

Philip Morris sank 1 to 46 1/4, Gillette slid 3/4 to 55 3/8, Anheuser-Busch fell 1 1/8 to 49 5/8, General Mills dropped 1 5/8 to 65 1/8, and Quaker Oats gave up 2 to 60 7/8.

But Dole Food rose 7/8 to 33 3/4 after reporting a 10% rise in quarterly operating earnings. The firm said it benefited from higher lettuce and celery prices, which helped offset lower banana prices.

Coca-Cola, which fell as low as 37 1/2 in trading, bounced up to close at 39 3/4, up 1/4. Coke said late in the day that it is buying up its own stock as it falls. The company said it has bought back about 750,000 shares this week.

* On the plus side, many bank stocks gained as interest rates fell. Wells Fargo leaped 1 7/8 to 109 1/2, Bankers Trust gained 1 3/4 to 73 3/4, Mellon soared 2 1/8 to 64 1/8, and J.P. Morgan added 1 3/8 to 68 3/4.

Overseas, renewed buying sent Tokyo’s Nikkei index up 138.04 points to 19,967.27, a new high for the year.

In Frankfurt, the DAX index added 5.42 points to 1,655.73. And in London, the FTSE-100 index eased 0.3 point to 2,821.8.

Other Markets

What was good for bonds was bad for the dollar: Currency traders dumped the buck as interest rates dropped, because the rate decline makes U.S. bonds less attractive for foreign buyers.

In New York, the dollar fell to 113.40 Japanese yen, down from 113.50 yen in New York late Wednesday. It was another postwar record low for the dollar against the Japanese currency.

The dollar also settled at 1.607 German marks, down from 1.619.

Meanwhile, near-term gold futures lost 80 cents to $337.60 an ounce on New York’s Comex. Silver settled at $3.83, down 3 cents.

On the New York Merc, light, sweet crude oil for May delivery fell 15 cents to $20.22 a barrel.

But natural gas futures soared again on continued tight supplies. May natural gas futures surged 7.5 cents to $2.23 per million British thermal units.

“With storage at a 10-year low and marginal gas in short supply, prices in the long term can only go up,” said analyst Brian Manolis of Paribas Futures.