Inflation News Aids Stocks, but Yields Rise Too
Stocks posted solid gains Friday on surprisingly mild inflation data, but less favorable aspects of the report sent long-term bond yields higher and the dollar lower.
The Dow Jones industrial average rose 20.31 to 3,773.45, up 1.23 for the week. In the broader market, advancing issues outnumbered decliners by about 4 to 3 on the New York Stock Exchange, where volume totaled 222.62 million shares.
The stocks of economically sensitive companies rose after the Labor Department reported that the producer price index fell 0.1% in May--the second straight monthly drop in a row--compared to an expected increase of 0.2%.
The drop in the price index lessened the threat of further credit tightening by the Federal Reserve Board, which has raised short-term interest rates four times this year.
But the bond and currency markets were alarmed by a 0.4% rise in the so-called core producer price index, which excludes volatile food and energy prices.
The increase was the biggest since January and was slightly higher than the 0.3% that analysts were predicting. It suggested that the Fed’s moves to raise interest rates this year may not have choked off economic growth, as had been feared.
This caused nervousness among bond- and dollar-based investors, who fear that the value of their holdings might be eroded.
The yield on the Treasury’s main 30-year bond closed at 7.31% from 7.27% on Thursday. Its price, which moves in the opposite direction, fell 6/16 point, or $3.75 per $1,000 in face value.
The dollar followed bonds lower in listless trading. In New York, the greenback ended the day at 103.50 Japanese yen, down from Thursday’s 103.95. It also fell to 1.667 German marks, down from 1.669.
Among the market highlights:
* Among cyclical issues in the 30 stocks that make up the Dow average, Caterpillar rose 1 5/8 to 105 1/8, International Paper added 7/8 to 70 1/8 and Alcoa advanced 1 3/4 to 73.
* Steel stocks advanced on heavy volume after J.P. Morgan Securities analyst Michael Gambardella said the stocks are a good buy as the industry begins to recover. Bethlehem Steel, also a Dow 30 component, rose 1 3/8 to 21 1/8; Inland Steel rose 1 1/2 to 35 1/4, and USX-US Steel added 7/8 to 34 7/8.
* Oil stocks rose following oil prices, which were firmer for most of the session but closed slightly lower. British Petroleum rose 2 3/8 to 71, Chevron advanced 1 1/8 to 90 3/4, and Mobil added 1 1/8 to 82 3/8.
* Semiconductor stocks rose following favorable book-to-bill shipment figures released by the industry Thursday. Texas Instruments rose 2 3/8 to 77 1/4. Intel added 63/64 to 59 63/64. Motorola advanced 1 1/4 to 46.
* Of the auto makers, Ford move up 7/8 to 57 1/8, Chrysler ended 3/8 higher at 47 and General Motors climbed 5/8 to 51 3/8.
Overseas stocks were mixed. London’s Financial Times 100-share average closed up 27 points at 3,055.9, a rise of 58.1 since last Friday. Frankfurt’s blue chip average closed 3.76 points higher at 2,133.08.
In Tokyo, the Nikkei 225-share average ended down 7.60 points at 21,395.18, while Mexico City’s Bolsa index finished down 27.81 points at 2,385.55.
Market Roundup, D4
Selected Interest Rates Averages of daily rates ended Thursday, in percent.
Corporate AAA bonds: 7.82%
90-day CDs: 4.44%
3-month Treasury bills: 4.11%
Bank prime rate: 7.25%
Municipal bonds: 6.09%
Federal funds rate: 4.13%
Discount rate: 3.50%
Source: Federal Reserve Board
