FINANCIAL MARKETS : Auto Stocks Skid, Taking Dow With Them; Yields Rise

Skidding automotive stocks and lackluster buying ahead of important economic data weighed down Wall Street on Thursday, with the market closing lower.

Long-term bond yields moved higher after a Federal Reserve official suggested that an employment report due out today might prompt the central bank to raise short-term interest rates.

Investment downgrades hit shares of the Big Three auto makers early, setting the tone for the session. Selling intensified toward the close after bond prices slumped on renewed fears that the Fed will raise interest rates again.

Investors, meanwhile, saw no reason to buy ahead of jobs data due out today that could move the market.

The Dow Jones industrial average, which reached its highest level since mid-June earlier this week, fell 26.87 points, closing at 3,765.79 as 294.29 million shares changed hands on the New York Stock Exchange.

Losers outnumbered gainers 4 to 3 on the Big Board.

Concerns about what the Labor Department’s employment data might suggest about economic growth caused many investors to sit on the sidelines Thursday. Most analysts expect the number of new jobs created in July to come in at about 215,000, significantly lower than June’s levels and indicating that the economy has slowed a bit and inflation is under control.

In a speech in Salt Lake City, Wayne Parry, president of the Federal Reserve Bank of San Francisco, said it isn’t clear that there is any slack in the labor market. Investors took that to mean that if the July data shows higher employment than is expected, the Fed may be prompted to raise short-term interest rates to cool off the economy.

Parry’s comments spooked bond traders, and the yield on the Treasury’s bellwether 30-year bond rose to 7.40% from 7.34% on Wednesday. Its price, which moves in the opposite direction, was down a quarter-point, or $2.50 per $1,000 in face value.

The bond selloff heightened anxiety among equity investors, who had been optimistic all week that a series of recent statistics portraying moderate economic growth would allow the Fed to keep interest rates where they are.

Stocks had rallied earlier in the week amid hopes for steady interest rates, but the renewed doubts about the rate outlook Thursday spurred selling.

Michael Metz, vice president at Oppenheimer & Co., said the analysts’ demotion of automotive issues cast a pall over the market.

“The story today was autos,” Metz said. “It put a chill on the market overall.”

Shares of the Big Three car makers fell in heavy trading after Merrill Lynch downgraded them for reporting the weakest sales in more than a year.

Investors closely monitor auto stocks as bellwethers of economically sensitive industries.

Among the market highlights:

* General Motors tumbled 2 1/8 to 50 3/4, Ford fell 2 to 29 1/2 and Chrysler Corp. was off 1 3/4 at 45 5/8, all on the New York Stock Exchange.

* An issue making its debut on the Big Board, Shandong Huaneng Power Development, was the volume leader, with 14.07 million American depository receipts changing hands. It closed at 14 1/4, unchanged from its offering price.

* Georgia-Pacific fell 2 3/8 to 67. Goldman Sachs removed the stock from its “recommended” list. Other paper stocks were also weak, including International Paper, off 1 1/8 at 75, and Weyerhaeuser, which dipped 1 1/8 to 43.

* Caremark International fell 2 3/4 to 22 3/4 in response to news that the company, a big supplier of intravenous drugs, was indicted for allegedly paying more than $1.1 million in kickbacks to a doctor who referred his patients to Caremark.

* General Electric dropped 1 1/8 to 48 1/2. GE’s Kidder, Peabody & Co. subsidiary released an in-house probe of a costly and embarrassing financial scandal that blames fired star trader Joseph Jett as the major culprit. The probe revealed lapses of supervision at the brokerage, and Kidder said it fired the manager who hired Jett three years ago.

* Wal-Mart Stores slipped 5/8 to 24 3/8 after the retailer reported its sales fell slightly in July. Sears Roebuck, which also had lower July sales, fell 7/8 to 47 1/4. Dayton Hudson rose 7/8 to 83 1/8.

* VSLI plunged 1 1/2 to 13 on news that Intel was discontinuing a technology agreement with VSLI to develop a new computer product and was divesting its stake in the company. Intel fell 1 3/4 to 57 1/4.

* Chiron rose 1 1/4 to 55 1/4 in response to news that it has entered a pact with Ribozyme Pharmaceuticals to develop drugs to treat HIV and several other diseases.

Action overseas offered little to inspire U.S. traders.

Frankfurt’s 30-share DAX average ended down 15.56 points at 2,183.36 as chemical stocks eased and weaker bond futures prices dampened market sentiment. In London, the Financial Times 100-share average closed at 3,150.5, down 9.9 points.

Stocks ended slightly firmer in Tokyo, with the Nikkei-225 average rising 44.11 points to close at 20,676.84. Mexico’s Bolsa index rose 6.50 points to close at 2573.81, its fifth straight gain and its highest level since March 7.

In currency trading, the dollar advanced in largely technical dealings ahead of the July employment report, with a rumored impending U.S. invasion of Haiti giving the greenback an early lift.

The dollar rose to its high for the week against the German mark, despite the absence of any significant new economic data or policy statements, a move PaineWebber Vice President Stephen Flanagan called a “bullish signal.”

The dollar closed in New York at 1.588 German marks, up from 1.578 on Wednesday. It also rose against the Japanese yen, closing at 100.38 yen, up from 100.35.

Lumber prices ended lower Wednesday after a Canadian-U.S. trade panel struck down American tariffs on Canadian wood imports.

The ruling by the joint panel could free up Canadian timber exports to the United States, which have been restricted since 1992 by a 6.5% duty collected by the U.S. government.

Despite the effect on prices, traders said they were skeptical about the actual impact of the ruling. It was the third time the tariff had been struck down by a bi-national panel and it was uncertain whether lumber mills would lower prices once the tariff was removed.

Before the ruling, lumber prices gyrated within a $17 range, on rumors that British Columbia timber workers were staging wildcat strikes. A union had in fact just called for strike vote.

September lumber ended $7.30 lower at $334.30 per 1,000 board feet, the lowest price for the spot contract since April 29.