Stocks rally on wholesale price report

WALL STREET

May 13, 1994|By Bloomberg Business News

NEW YORK -- U.S. stocks gained yesterday after bonds rallied when a government report showed wholesale prices fell in April.

The Dow Jones industrial average advanced 23.80, to 3,652.84, after rallying as much as 34.80 in the morning, fed by gains in Philip Morris Cos., AlliedSignal Inc. and Sears, Roebuck & Co. Yields on the government's benchmark 30-year bond fell to 7.56 percent from 7.60 percent.

Stocks surged when the Labor Department released the producer price index for April, which showed a decline of 0.1 percent in wholesale prices, instead of the expected 0.2 percent increase.

The evidence that inflation remains weak, plus recent increases in interest rates, tell investors "that if we're not at the high end of the interest-rate cycle, we're pretty darn close to it," said James Bellini, director of trading at Dain Bosworth in Minneapolis.

In the broader market, the Standard & Poor's 500 index rose 2.26, to 443.75, driven by tobacco, oil, telephone, retail and drug stocks. Philip Morris jumped $3, to $50.50, on speculation its board will separate its tobacco and food businesses at a May 25 meeting.

The Nasdaq combined composite index rose 2.61, to 719.61, fueled by gains in Oracle Systems Inc., Novell Inc., Microsoft Corp., U.S. Healthcare Inc. and Parametric Technology Corp.

More than 11 stocks advanced for every nine that fell on the New York Stock Exchange, where volume reached 272.8 million shares, down from 277.4 million Wednesday.

Coming one day before the government's release of the April consumer price report, yesterday's wholesale price report eased concern among stock market investors that inflation is about to grow, traders said.

The wholesale price report also led some traders to speculate the Fed might moderate its next rate increase. The Fed's policy-making council meets next Tuesday.

Given the unexpected decline in producer prices, "the Federal Reserve has probably made a judgment that, as it stands now, inflation is not a problem," said Thomas Gallagher, head trader at Oppenheimer & Co.

So far this year, consumer prices have risen at an annual rate of 2.8 percent.

"The Fed knows these numbers before we do," Mr. Gallagher said, and is unlikely to raise the federal funds rate, the rate on overnight loans between banks, higher than 4 percent, or the rate on overnight Fed loans to banks beyond 3.5 percent at its next policy meeting.

The Fed has raised rates on overnight bank loans three times since early February, to 3.75 percent from 3 percent, in an effort to head off inflation.

Investors will soon see "we have the best of all possible worlds," Mr. Gallagher said. "We have continued growth in the economy with low to moderate inflation."

To be sure, others are less optimistic, pointing to yesterday's 0.79 drop, to 177.76, in the Dow Jones utilities average, its lowest since August 1988.

"For some reason, I don't trust" yesterday's upward move in stocks, said Jim Benning, trader at BT Brokerage. "You can't fight the Fed. You know interest rates are going up."

L.M. Ericsson Telephone Co., Cisco Systems Inc., Philip Morris Cos., Perrigo Co. and ADT Ltd. were the most active stocks in composite trading.

Ericsson's American depositary receipts rallied for a second day, gaining $2.375, to $46.375. The Swedish telecommunications equipment maker this week said first-quarter pretax profit expanded 90 percent, to $105 million.

Margaretten Financial Corp. rose $1.71875, to $24.59375. The mortgage company agreed to be acquired by Chemical Banking Corp. for $25 a share, or $330 million. Chemical was unchanged, at $34.375.

Other mortgage companies rose in tandem with the purchase.

American Residential Holdings Corp. closed up $1.50, at $18.75; North American Mortgage rose as much as $1.25, to $26; and Countrywide Credit Industries Inc. rose 12.5 cents, to $14.25.

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