Financial Markets : Inflation News Rallies Bonds; Dow Adds 17

The bond market finally got some good news on inflation, spurring a modest rally Friday as traders braced for the Federal Reserve Board’s policy meeting next Tuesday.

Stocks staged a more convincing rally, as takeover speculation helped power the Dow industrials up 17.81 points to 3,768.71.

Bond yields declined broadly after the government reported that July consumer prices rose 0.3%, which was within expectations.

On Thursday, yields had rocketed on the July wholesale inflation report, which had come in higher than expected.

The 10-year Treasury note yield, which jumped from 7.30% on Wednesday to 7.36% on Thursday, fell back to 7.29% on Friday. Two weeks ago the yield was at 7.10%.

The seesawing of interest rates Thursday and Friday didn’t change many traders’ minds about the likely outcome of next Tuesday’s Fed meeting. The central bank is widely expected to boost short-term rates again in an attempt to further slow the economy.

Short-term T-bill yields were mostly unchanged on Friday, even as longer-term yields eased.

James Solloway, research chief at Argus Research, said Friday’s consumer inflation report might sway the Fed to limit its rate hike to a quarter-point instead of a half-point.

But many other market players are convinced the Fed will use a half-point increase to show it is serious about restraining inflation.

Also, renewed rate increases in Europe this week, by the Swedish and Italian central banks, could encourage the Fed to go with a half-point rate hike to keep the dollar from heading into a new downward spiral.

Across Europe Friday, bond yields continued to rise, responding to the Swedish and Italian boost in short rates on Thursday. The yield on the 10-year German government bond hit 7.23% Friday, highest since June 21.

European rate worries pummeled stocks on the Continent for a second day. In Frankfurt, the DAX stock index dropped 30.60 points or 1.4% to 2,124.68. In Paris, the CAC index sank 31.98 points to 2,006.95.

In London, however, stocks got a late lift with the U.S. market rally, and the FTSE-100 index added 4.1 points to 3,142.30.

On Wall Street, many investors appeared to be resigned to another Fed rate boost but were finding reasons to buy stocks anyway.

Friday was “further evidence that the market has unhinged stock prices from interest rates,” said analyst Louis Ehrenkrantz of Ehrenkrantz King Nussbaum.

In the broad market, advancing issues outnumbered decliners by about 3 to 2 on the New York Stock Exchange, on moderate volume.

The Nasdaq composite index of mostly smaller stocks rose 3.41 points to 731.61, bringing its gain for the week to 1.8%. In contrast, the Dow inched up 21.69 points or 0.6% for the week.

Technology stocks, which had led the Nasdaq market’s comeback this week, lost some steam on Friday, but other market sectors picked up the slack.

Among Friday’s highlights:

* Food stocks surged on renewed takeover rumors, even though the supposed foreign buyer--Nestle--denied it is interested in a major acquisition. CPC International jumped 1 3/4 to 51 7/8, Kellogg gained 1 3/4 to 55 3/8, Quaker Oats leaped 1 3/8 to 74 7/8, Ralston Purina surged 2 3/4 to 40 and Heinz added 1 1/8 to 37 1/8.

* Drug stocks also appeared to benefit from new takeover talk, centering on a purported foreign bid for Lilly. Lilly shares rose 1/2 to 53, Warner-Lambert jumped 1 1/2 to 77 5/8, Bristol-Myers gained 3/4 to 55 7/8 and Schering-Plough was up 3/4 to 69.

Biotech firm Amgen also was mentioned as a potential target, and its stock gained 1 5/8 to 53 3/8, a 1994 high.

But Syntex slumped 7/8 to 21 3/4 on rumors that Roche Holdings of Switzerland was planning to cancel its previously announced bid for Syntex. Roche denied the rumors.

* Hilton Hotels tumbled 2 3/8 to 60 5/8. The firm said it dropped out of the bidding for a gaming license in Athens, Greece.

In other overseas markets, Tokyo’s Nikkei 225-share average lost 157.53 points to 20,663.83.

In Mexico City the Bolsa index staged another major rally, rising 40.87 points to 2,637.76.

In currency trading, the dollar continued to work its way lower, responding to higher European interest rates.

The dollar fell to 1.552 German marks and 100.15 Japanese yen in New York, down from 1.561 marks and 100.23 yen Thursday.

Market Roundup, D3