Factory Report Sparks Rallies in Stocks, Bonds

Bond yields fell for a third day Thursday, pushing prices higher and sparking a broad, powerful rally in stocks--all in reaction to a surprising report of slower U.S. factory expansion last month.

The report, the latest to suggest uneven strength in the nation’s economy, reinforced hopes among investors that the Federal Reserve Board will refrain from raising interest rates at its rate-policy meeting in mid-August.

The Dow Jones industrial average jumped 65.84 points to 5,594.75, for a three-day gain of more than 160 points. Earlier in the session, the Dow surpassed 5,600 for the first time since last month’s plunge below 5,200.

More important, Thursday’s gains were spread across the market, demonstrating renewed confidence among investors, analysts said. There were nearly 4 advancing issues for every 1 that declined in price on the New York Stock Exchange. The Standard & Poor’s 500-stock index rose 10.07 points to 650.02, and the Nasdaq composite index rose 18.26 points to 1,098.85. “Of the days we’ve been up, [Thursday] is the most healthy up day we’ve had. More stocks have participated than we’ve seen over the last week,” said Bob Dickey, managing director at Dain Bosworth in Minneapolis.

For bonds, Thursday saw the 30-year Treasury make its biggest one-day price surge in nearly four months. That capped a climactic three-day rally this week that has pushed yields down a steep one-quarter percentage point. The long bond yield dropped to 6.83%, matching the May 24 close, down from 6.96% late Wednesday.

Investors began snapping up bonds after the the National Assn. of Purchasing Management reported that its index, which measures manufacturing activity, fell to 50.2% last month from 54.3% in June. Economists had been expecting a rise to 55%. The purchasing managers group also reported that the overall economy grew at a very slow rate in July after having expanded strongly in June.

The report added to general investor optimism about stocks.

“Investors are not afraid anymore,” said Joseph Battipaglia, chief investment strategist at Gruntal & Co. “They’ve come out of the trenches, and the economy is doing well.” He said he does not believe the Fed will raise rates in August.

“In 1994 [it] was a very different year from 1996,” he said. “We had a 5% growth rate, and now we’ll be lucky if we see 3%.” The Fed’s last cycle of rate increases started in 1994.

The enthusiasm over the purchasing managers report notwithstanding, some investors are nervously awaiting what the July employment report will say when it is released Friday. Many economists believe the data will suggest slowing growth, but four of the last five monthly employment reports have indicated surprisingly strong growth in new jobs and hourly wages, spurring steep sell-offs. Labor costs represent two-thirds of a product’s price and are thus a key factor in determining the pace of inflation.

Thursday’s rally was probably reined in because the Commerce Department reported that the economy grew at a 4.2% annualized rate in the second quarter, the strongest rate of growth in two years. But the report also indicates that price rises were slowing, a sign inflationary that inflationary pressures may be easing.

Among market highlights:

* Interest-rate sensitive stocks rose as bond yields headed lower. Fannie Mae rose 1 1/2 to 33 1/4, Freddie Mac rose 3 3/4 to 88, BankAmerica rose 1 7/8 to 81 1/2, Citicorp rose 1 3/8 to 83 1/4 and Wells Fargo added 4 1/4 to 237 1/8.

* Silicon Graphics fell 1 to 22 1/2 on news that Thomas Jermoluk resigned as president.

* Boeing rose 5/8 to 89 1/8 on news that it had agreed to buy Rockwell International’s aerospace and defense business in a $3.2-billion transaction. Rockwell rose 2 3/4 to 55 1/4.

* SciClone lost 4 1/4 to 7 7/8 on disappointment over trial results for its Zadaxin drug for hepatitis B.

* Several initial public offerings attracted interest. Caribbean Cigar, a premium cigar maker, rose 4 3/8 to 11 3/8; Golden Bear Golf, controlled by golf pro Jack Nicklaus, rose 2 1/2 to 18 1/2.

Overseas, Tokyo’s Nikkei-225 stock average rose 1.4%, Frankfurt’s DAX index rose 0.9% and London’s FTSE-100 rose 0.8%.

Crude oil prices rose sharply Thursday, and platinum prices hit their highest level in 2 1/2 months. Soybean prices also rose because of concerns about weather.

One oil broker said the market was reacting to rumors that Congress was claiming an Iran-backed group was behind the July 17 crash of TWA Flight 800.

September crude oil closed 62 cents higher at $21.04 a barrel on the New York Mercantile Exchange.

Platinum prices rose on news of another South African miners strike and in response to uncertainty about Russian exports. October platinum futures on the New York Mercantile Exchange closed up $1.90 an ounce at $409.10 after reaching a high of $412.00.

Market Roundup, D6