FINANCIAL MARKETS : Stocks Soar on Inflation News, Then Retreat

Stocks and bonds rallied sharply early Thursday on a surprise drop in September wholesale prices, but retreated later in the day as caution set in ahead of economic reports due out today.

After shooting up 52 points within 15 minutes of the opening bell, the Dow industrial average finished the day with a gain of just 14.80 points, to 3,889.95.

In the bond market, the yield on the Treasury’s bellwether 30-year bond plummeted as low as 7.76%, then rebounded to close at 7.85%, down from 7.90% on Wednesday. Shorter-term yields fell by about the same amount.

The impetus for the early gains was a government report that wholesale prices fell a surprising 0.5% in September, while economists had expected a 0.1% rise.

For the inflation-paranoid bond market, the report suggested that worries about a new upward spiral in prices as the economy expands have been grossly exaggerated.

That may eliminate the need for additional hikes in short-term interest rates to restrain the economy, experts said.

James Solloway, research chief at Argus Research, called the data a “very pleasant surprise after all the fear in the buildup to the release that this number created.”

Yet while buyers flocked to stocks and bonds early in the day, they began to reconsider as trading wore on, jittery about several key economic reports due today.

The government will report this morning on September consumer inflation as well as industrial production and retail sales.

Bullish analysts, noting how strong investors’ appetite for stocks and bonds was at the outset of trading Thursday, said favorable news in today’s economic reports could set the stage for a dramatic rally, especially in bonds.

But longer-term, some analysts warn that bond yields may not be finished rising, if the economy continues to grow.

“It’s pretty likely we are going to see inflation trends worsen somewhat and pretty likely we’ll see upcoming reports showing the economy has a fair amount of momentum to it,” said Dana Johnson, head of market analysis for First Chicago Capital Markets.

“The better bet is that this isn’t the end of the bear market” in bonds, Johnson said.

It was one year ago this week that the yield on 30-year T-bonds bottomed at a 20-year low of 5.79%. The subsequent surge in interest rates over the last year has resulted in some of the worst bond market principal losses in history for investors.

Among Thursday’s highlights:

* Most broad stock market indexes closed with marginal gains. The NYSE composite index added 1.08 points to 257.43, and the Nasdaq composite index inched up 0.89 point to 767.89. Winners topped losers by 13 to 9 on the NYSE, in heavy trading of 338 million shares.

* Among stocks getting a lift from quarterly earnings reports, toy maker Hasbro gained 1 1/4 to 30 1/4, computer chip maker Altera surged 5 5/8 to 33 5/8, chemical firm B.F. Goodrich gained 1 to 43 1/8 and publisher Houghton-Mifflin rocketed 3 1/8 to 43 7/8.

* Stocks falling on earnings news included Inland Steel, down 1 1/4 to 37 1/2; Bausch & Lomb, down 4 3/8 to 34 1/4; Three-Five Systems, off 9 1/2 to 38 1/2, and Raytheon, down 1 3/4 to 63.

Also, CBS tumbled 20 to 309 1/2. Prudential and PaineWebber downgraded the stock to “neutral” amid concern over weak earnings and disappointing TV ratings.

* Many brokerage stocks got a big lift from the market’s early rally. Morgan Stanley closed up 1 3/8 to 62 5/8, Charles Schwab soared 1 3/8 to 33 3/8 and PaineWebber added 5/8 to 14 7/8. But Merrill Lynch lost 3/4 to 34 3/8.

* Ford Motor eased 1/8 to 28 7/8 despite news that it raised the cash dividend on its common stock 15.5%, to 26 cents per quarter. It marks the auto giant’s second increase this year.

In overseas markerts, London’s FTSE 100 index resumed its stunning recent rally, surging 41.4 points to 3,141.9. In Frankfurt, the DAX index added 5.06 points to 2,082.63.

In Tokyo, the Nikkei-225 index gained 59.11 points to 20,148.83.

Mexico City’s Bolsa index added to Wednesday’s big gains, rising 18.79 points to 2,759.61.

In currency markets, the dollar finished mostly lower, faltering after a rally inspired by the favorable inflation data. The dollar closed in New York at 99.46 Japanese yen and 1.529 German marks, down from 99.77 yen and 1.541 marks on Wednesday.

Elsewhere, gold prices lost ground at home and abroad. On the Comex, gold for current delivery slid $1.90 an ounce to $386.10. December silver futures dropped 13 cents to $5.39 an ounce.