Growth Report Puts Spring in Stocks’ and Bonds’ Step
Interest rates plummeted Friday and stocks rose strongly after a key government report suggested that a marked slowdown in the economy is at hand.
The news on second-quarter gross domestic product growth dissolved much of the worry about inflation that has dogged markets in recent months. It also suggested that the Federal Reserve Board may give up any thought of raising short-term interest rates soon.
In the bond market, yields tumbled across the board as the market staged its biggest rally since May.
The 30-year Treasury bond yield slumped from 7.55% on Thursday to 7.39% at Friday’s close, the lowest level since June 16. The yield had peaked at 7.73% on July 11.
On Wall Street, the Dow Jones industrial average gained 33.67 points to 3,764.50, its highest level since June 17, though on fairly modest trading volume.
While analysts said some of the rally in stocks and bonds was owed to “short” covering--panicked buying by bearish traders who had previously sold borrowed securities, expecting them to fall further--there also was healthy genuine demand from investors.
Many of Friday’s buyers may be assuming that the economy’s pace will slow enough to allow long-term interest rates to ease further and to at least halt any Fed hike in short-term rates that may have been imminent.
Indeed, the yield on three-month Treasury bills, a proxy for Fed actions, sank to 4.37% from 4.54% on Thursday. Traders said the market was signaling that it expects the Fed to leave short-term rates alone for now.
“It’s funny how sentiment changes in a day,” said Guy Truicko, equity portfolio manager at Unity Management. “All of a sudden everyone’s calling off the dogs” on higher interest rates.
Some Wall Streeters, however, warned that the Fed may still decide to tighten credit for a fifth time when it meets Aug. 16, because of concern about inflation that may still be in the system.
Yet the second-quarter GDP report showed that a key measure of inflation rose a moderate 2.9% in the quarter, the same as the first three months of the year.
If next week’s batch of June and July economic statistics confirm a slower economy, some Wall Streeters believe sidelined money could pour back into stocks and bonds.
On Friday, the only surprise was that bond market’s gains didn’t spur a bigger stock rally. Winners topped losers by 16 to 6 on the Big Board, but volume was rather muted at 269 million shares.
Most major stock indexes rose less than 1%, though the Nasdaq composite index of mostly smaller stocks jumped 9.73 points, or 1.4%, to 722.16.
Still, if strong second-quarter corporate earnings reports and falling interest rates persist next week, the combination could fuel a healthy summer rally in stocks, some experts say.
Among Friday’s highlights:
* Despite an implied slowdown in the economy, investors flocked back to industrial stocks. Analysts said buyers’ assumption is that a slower, stretched-out economic expansion would guarantee longer profit growth for industrial firms.
Alcoa jumped 1 3/8 to 78 1/4, Caterpillar rose 1 1/8 to 108 3/8, Scott Paper gained 1 1/4 to 57 3/4, Air Products & Chemicals jumped 1 3/8 to 48, Timken leaped 2 1/8 to 34 7/8 and Dow Chemical was up 1 to 69 1/8.
Auto stocks also rose. Ford added 7/8 to 31 7/8, GM surged 1 1/8 to 51 3/8 and Chrysler advanced 3/4 to 48 1/8.
* Steel stocks were helped by a bullish prognosis from brokerage J.P. Morgan. LTV rocketed 1 5/8 to 18 3/4, Bethlehem Steel advanced 1 to 22 1/4, Inland Steel added 1 to 38 and USX-U.S. Steel climbed 1 1/4 to 37 1/2.
* Rebounding technology stocks drove the Nasdaq market higher. Apple Computer soared 1 13/16 to 33 11/16, Intel gained 1 3/8 to 59 1/4, Microsoft rose 2 to 51 1/2, Sybase jumped 2 3/8 to 39 3/8 and AST Research was up 1 1/8 to 14 7/8.
But America Online dove 5 to 55 5/8. Investor Paul Allen revealed that he has cut his stake in the firm to 9.7% from 18%.
* Among Southland issues, New Image Industries soared 4 to 14 3/4. The dental-imaging systems maker said it will be acquired by Dentsply International for $16.38 a share in cash.
In overseas markets, Tokyo’s Nikkei index rose 201.54 points to 20,449.39. In Frankfurt, the DAX average closed at 2,146.64, up 23.83 points. In London, the FTSE-100 index eased 13.3 points to 3,082.6.
Mexico City stocks’ rally resumed, with the Bolsa index up 33.12 points to 2,462.27, the highest since June 6.
In currency trading, the dollar slipped back below 100 Japanese yen as new concerns about the weekend’s U.S.-Japan trade talks erased an early boost.
The dollar closed in New York at 99.95 yen, down from 100.10 on Thursday, and at 1.583 German marks, down from 1.5910.
In commodities markets, September crude oil futures jumped 53 cents to $20.30 a barrel on fears that Nigeria’s 4-week-old oil workers strike may worsen.
Market Roundup, D3
Selected Interest Rates Averages of daily rates ended Thursday, in percent.
Corporate AAA bonds: 8.08%
90-day CDs: 4.46%
3-month Treasury bills: 4.42%
Bank prime rate: 7.25%
Municipal bonds: 6.22%
Federal funds rate: 4.28%
Discount rate: 3.50%
*
Source: Federal Reserve Board
