Markets Rally Ahead of Fed; Gold Slumps

Completing a week in which the Dow Jones index swung more than 100 points within each session, stocks closed broadly but modestly higher Friday as bond yields eased.

Both markets appeared to be confident that the Federal Reserve, which meets Tuesday and Wednesday, won’t tighten credit again. That was echoed by gold’s price, which hit a four-year low.

The Dow index ended 33.47 points higher at 7,687.72, after being up as much as 116 points.

Broader indexes also closed up by relatively small amounts. Even so, breadth was strong, with winners topping losers by nearly 2 to 1 on the New York Stock Exchange.

Stocks got early support from bonds, which broke out of a weeklong slide, lifted by the Fed’s unexpected purchase in the market of longer-term U.S. Treasuries.

The bellwether 30-year Treasury bond yield fell to 6.73% from 6.78% on Thursday.

“Next week is going to be supportive” of bonds, predicted Scott Grannis, economist at Western Asset Management in Pasadena. “The Fed won’t do anything, and we won’t see any signs [in economic data] of a rebound” from the slower pace of growth since the torrid first quarter.

But some stock traders appeared to be hedging their bets on Friday, as the rally faded late in the day.

Volatility was the story all week. After setting a record of 7,769.51 a week ago, the Dow tumbled 192 points Monday, only to rise 154 points Tuesday.

For the week, the index lost 108.79 points.

“Nothing much has happened, but you’ve traveled a lot of miles in between,” said Alfred Kugel, strategist at Stein Roe & Farnham in Chicago.

Analysts expect the market’s next focus to be on second-quarter corporate earnings reports.

Meanwhile, in commodity trading Friday, slumping grain and gold prices signaled a continued benign inflation outlook. Near-term gold futures lost $3.90 to $334.80 an ounce in New York, a four-year low.

Among Friday’s highlights:

* The best performers were cyclical industrial stocks--a seeming vote of confidence in the economy’s ability to continue growing. Caterpillar rose 2 3/8 to 108, Ford Motor gained 5/8 to 39, Ingersoll-Rand rose 1 1/16 to 61 and Goodyear Tire added 1 1/2 to 63 1/4.

* Drug issues climbed again, led by Warner-Lambert, up 4 15/16 to 123 15/16, Merck, up 3/4 to 102 1/2 and Pfizer, up 2 3/4 to 122.

* Banks were the main beneficiary of the drop in interest rates, as the outlook for lending margins improved. Banc One rose 1 to 49 3/4, Citicorp gained 1 to 120 3/4 and BankAmerica rose 1 5/16 to 66 3/8.

* AT&T; fell 5/16 to 35 13/16 and SBC Communications fell 3/16 to 59 15/16 after reports that merger talks between the telecommunications companies were unraveling.

Market Roundup, D4