Economic Data Spark Rallies in Bonds, Stocks

Bond yields plunged and stocks zoomed Thursday as the latest economic reports suggested the Federal Reserve Board may now decide against tightening credit this month.

Long-term bond yields tumbled to their lowest levels since late May, and the Dow Jones industrial average shot up 65.84 points, or 1.2%, to 5,594.75.

But even as markets rallied, some analysts warned that the most important economic report of the week is due today: the July employment report.

On Thursday, however, worries about the July jobs data were overwhelmed by reports that showed weakening manufacturing activity in July and subdued inflation in the second quarter, despite strong economic growth.

And because Fed Chairman Alan Greenspan had recently pointed to this week’s reports as key in the central bank’s debate over whether to raise short-term interest rates to slow the economy, bond traders, in particular, were elated.

“Everybody was prepared for the worst, and we got great news. The economy isn’t shrinking, but the growth rate clearly is slowing,” said Patrick Retzer, who oversees $300 million of bonds at Heartland Advisors in Milwaukee.

Heavy bond buying produced the biggest one-day price gain in bonds in nearly four months, driving the yield on the 30-year Treasury bond down to 6.83% from 6.96% Wednesday. The yield now is the lowest since May 24.

Shorter-term yields also slid. The yield on two-year T-notes slumped to 6.08% from 6.23% Wednesday. That yield was 6.35% as of Monday.

Investors began snapping up bonds Thursday after the National Assn. of Purchasing Management reported that its index, which measures manufacturing activity, fell to 50.2% in July from 54.3% in June.

As traders also focused on the government’s report on second-quarter gross domestic product growth, they were heartened by data showing that, despite an annualized 4.2% surge in GDP, a key measure of price inflation rose at a slower pace than in the first quarter.

Signs of slowing growth and subdued inflation are exactly what the Fed wants to see, many analysts argue. That will make it easier for the central bank to defer raising short-term interest rates when it meets Aug. 20.

But economists warned that today’s July employment report still could force the Fed’s hand, if job growth last month was robust.

Greenspan has said that an increasingly tight labor market could force wages up sharply, sparking a cycle of higher inflation. By raising rates, the Fed could guarantee an economic slowdown that would limit job growth and thus limit upward pressure on wages.

On Thursday, however, bond and stock buyers were mostly celebrating. For the recently battered stock market, hopes for falling interest rates and slower, more sustainable growth raise the prospect of a continuing economic expansion into 1997.

That lured many buyers into stocks Thursday. Winners swamped losers by 20 to 6 on the New York Stock Exchange, in heavy trading.

Winners there had a smaller edge over winners on Nasdaq, but the Nasdaq composite index’s gain of 1.7% was well above the Dow’s 1.2% rise.

“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.

Among Thursday’s highlights:

* Interest-rate-sensitive stocks rose as bond yields tumbled. Federal National Mortgage rose 1 1/2 to 33 1/4, Federal Home Loan Mortgage surged 3 3/4 to 88, BankAmerica gained 1 7/8 to 81 1/2 and SunAmerica leaped 1 3/8 to 62 1/8.

Also, the Dow Jones utility index shot up 1.4%.

* Among blue chips, Alcoa gained 1 3/4 to 59 3/4, Disney surged 1 3/4 to 57 3/8 and Coca-Cola added 1 1/4 to 48 1/8.

* Drug stocks were very strong. Merck soared 1 5/8 to 65 7/8, Eli Lilly jumped 2 to 58 and Bristol-Myers gained 1 7/8 to 88 1/2.

* The tech sector advanced, although interest was concentrated in some of the biggest tech firms. Microsoft jumped 2 3/4 to 120 5/8, Intel gained 1 7/8 to 77 and Computer Associates rose 1 3/4 to 52 5/8.

* Winners among smaller stocks included Boston Chicken, up 2 to 28 1/2; Protection One, up 1 3/8 to 16; Oakley, up 1 1/2 to 35 3/8; and Pacific Sunwear, up 2 1/8 to 21 1/8.

* Several initial public offerings attracted interest. Caribbean Cigar, a premium cigar maker, surged 4 3/8 to 11 3/8; Golden Bear Golf, controlled by golf pro Jack Nicklaus, jumped 2 1/2 to 18 1/2. Golden Bear’s ticker symbol: JACK.

In foreign trading, Mexican stocks soared with U.S. shares, with the Bolsa index gaining 111.10 points, or 3.7%, to 3,118.35.

Stocks’ and bonds’ rallies weren’t hindered by a jump in oil prices. Crude oil futures shot up 62 cents to $21.04 a barrel in New York futures trading.

Traders cited a news report that an Iranian terrorist group may have bombed TWA Flight 800. That raised fears that if the report proves true the United States would retaliate and thus threaten Middle East oil supplies.

Market Roundup, D6