FINANCIAL MARKETS : Dow Is Off 3.80; Yields Edge Higher

Financial markets closed modestly lower Friday on the heels of data showing potential strength in the economy.

The Dow Jones industrial average eased 3.80 points to 4,585.84 after recovering most of a 17-point loss posted early in the session. The Dow still managed a gain of 75.05 points for the week and closed a hair below its record of 4,589.64 set Thursday.

In the bond market, yields finished slightly higher but down from their peaks early in the day. The 30-year Treasury bond yield closed at 6.49%, up from 6.47% on Thursday but down from 6.61% a week ago.

Stocks stumbled early as bond yields jumped, responding to the government’s report that orders to U.S. factories for big-ticket durable goods rose 2.5% in May.

That marked the first advance in four months and seemed to throw cold water on the idea that the economy is still decelerating.

Because many investors have assumed that the economy was in danger of falling into recession, expectations have been running high that the Federal Reserve Board will cut short-term interest rates when it meets July 5.

With the durable goods report, however, “it’s no longer as certain in some people’s minds” that the Fed will lower rates in July, said Gerald Guild, bond trader at Advest Inc. And that could cause bond yields to reverse quite sharply in coming weeks, some traders warn.

Indeed, yields on Treasury securities have fallen so far this year, anticipating sustained economic weakness, that even five-year T-note yields--at 5.82% on Friday--are below the Fed’s benchmark overnight interest rate of 6%.

Still, on Friday sellers seemed to hold back, perhaps hoping that next week’s economic reports will show fresh weakness in consumer and business activity.

Action was similarly muted in stocks Friday. Declining issues outnumbered advancers by 13 to 9 on the Big Board, but volume dropped to 318 million shares from 422 million on Thursday.

Most broad stock indexes were marginally lower.

Share prices didn’t fall further because money managers who have underperformed popular stock indexes this year are trying to catch up, said Steve Mindnich, a trader at Jefferies & Co.

“Until proven differently, any pullback is seen as a buying opportunity,” Mindnich said.

Among Friday’s highlights:

* Many financial stocks were lower in profit taking. NationsBank lost 1 1/8 to 56 1/4, Shawmut National eased 7/8 to 31 5/8, SunTrust Banks dropped 1 3/8 to 58 1/4 and Charles Schwab lost 7/8 to 44 7/8.

* Some health care issues also gave ground. Bristol-Myers fell 3/4 to 68 7/8, Columbia/HCA sank 1 1/2 to 44 3/8, Amgen lost 1 3/8 to 76 3/4 and Humana eased 1/2 to 19 3/8.

Also, Coram Healthcare fell 1 3/8 to 17 1/8 after Lincare Holdings said late Thursday that it would indefinitely postpone a proposed merger.

* Some paper and lumber stocks got a lift on news reports that Kimberly-Clark and Scott Paper are talking merger. Kimberly jumped 2 1/4 to 62 1/2, Scott gained 1 1/8 to 48, Stone Container added 1/2 to 20, Champion International surged 2 to 54 1/2 and Boise-Cascade gained 1 to 38 5/8.

* Some industrial issues may have gotten a lift from the durable goods report. Nucor rose 1 1/8 to 50 3/8, Inland Steel added 7/8 to 29 1/8 and Bearings rose 1/2 to 31 1/4.

* Technology stocks were mixed. Adobe Systems shed 4 1/4 to 61 1/4 after traders viewed the company’s $500-million bid for Frame Technology as too high.

Also falling was Digital Equipment, down 7/8 to 41 3/8, and Computer Associates, off 1 1/4 to 69 7/8.

But i-STAT soared 10 7/8 to 38 1/2 after Hewlett-Packard said it would buy a 14% stake in the company for $61 million.

* USAir sank 7/8 to 12 1/2. The company was rumored to be targeting TWA or Hawaiian Airlines for possible acquisition, but USAir officials denied it.

In foreign trading, Tokyo’s 225-share Nikkei average jumped 338.81 points to 15,265.18, and Mexico’s Bolsa index added 5.5 points to 2,053.17, despite Brazil’s surprise decision to devalue its currency by as much as 6.5%.

The dollar was weaker after three big German states reported higher inflation, dousing hopes that Germany’s central bank will cut interest rates soon.

In New York, the greenback ended at 1.386 German marks, down from 1.397 on Thursday.