Stocks Gain, Yields Drop on Tame Inflation

Stocks closed slightly higher Thursday, but for the second straight session a sharp run-up evaporated as the market again consolidated its steep, summerlong rally.

Broad-market indexes also ended higher as bond market interest rates fell for the second straight day on encouraging inflation news.

The Dow Jones industrial average ended up 13.71 points at 7,942.03. The blue-chip index has soared nearly 880 points so far this summer on the back of moderate economic growth and subdued inflation.

Stocks got some support from the bond market, which rallied after the government reported that the consumer price index rose a mere 0.2% in July, in line with forecasts.

The data helped calm recent fears that the economy is accelerating at a pace that would rekindle higher inflation. Traders worry that a fresh surge in the 7-year-old economic expansion will cause the Federal Reserve Board to put on the inflation brakes by pushing up interest rates. Fed policymakers meet again Tuesday.

The price of the benchmark 30-year Treasury bond was up nearly a full point, which lowered its yield to 6.54% from Wednesday’s 6.62%.

Despite the retreat in bond interest rates from a recent peak of 6.70%, the stock market still felt that the long bond’s yield was still high. The rate is nearly a quarter-point higher than the 6.33% of July 30, when the Dow stood at a then-record 8,254.89.

Stocks mirrored Wednesday’s pattern, as the market burst higher at the open in relief over tame inflation data, only to sharply reverse course later in the session.

With their interest rate wish list evidently on hold, investors displayed an edgy willingness to sell into any market strength, analysts said, and stocks continued to work through a choppy consolidation.

“This is the kind of consolidation that has to go on after a significant run-up,” said Scott Bleier, chief investment strategist at Prime Charter. Declining issues outnumbered advancers by an 11-9 margin on the New York Stock Exchange in heavy trading.

The Standard & Poor’s 500-stock list rose 2.75 points to 924.77, and the NYSE composite index rose 1.24 points to 479.66. The Nasdaq composite index rose 3.29 points to 1,586.69.

Among Thursday’s highlights:

* Pushing the Dow higher were Procter & Gamble, up $2.69 at $144.44; Hewlett-Packard, up $2 at $69.88; and Johnson & Johnson, up $1.94 at $59, whose rise came after rival American Home Products paid the drug company $100 million to settle a dispute over a birth-control patent. American Home rose $2 to $77..

* Nasdaq was helped by strength in Cisco Systems, up $1.88 to $77, and 3Com, up $1.56 to $55.75.

Among other technology stocks, Vantive rose $2.69 to $32.31 after the software company said it will buy Innovative Computer Concept, another software company.

* Biotechnology firm Amgen rose 63 cents to $49.88 one day after shares fell to a six-month low.

Among other biotech and drug stocks, Merck gained 88 cents to $93.31, Pfizer was up 63 cents to $54 and Eli Lilly rose 63 cents to $105.19.

* Oil-drilling companies fell on speculation that drilling contractors may get less money for renting rigs in the Gulf of Mexico.

Schlumberger lost $1.69 to $72.25, Global Industries dropped $1 to $30.88 and Cooper Cameron fell 50 cents to $56.56.

* Financial companies gained on bond yields’ fall. Citicorp gained $1.25 to $136.25, Chase Manhattan rose 81 cents to $111.94 and BankAmerica gained 31 cents to $68.69

* Gold shares fell after Goldman Sachs analyst Daniel R. McConvey downgraded several gold companies. Pegasus Gold fell 6 cents to $5 and Echo Bay Mines dropped 19 cents to $5.19.

Gold for December delivery fell $2.70 to $328.00.

In currency trading, the dollar jumped against the Japanese yen amid concern that a worsening currency crisis in Southeast Asia could damage Japan’s fragile economy.

The yen slumped across the board after Indonesia announced a de facto float of its currency, following similar actions by neighboring countries in recent weeks. Indonesia’s currency, the rupiah, fell about 5% overnight, hitting a record low.

Traders feared that Japan might be forced to devalue its own currency to compete with other countries in the region.

“There is definitely a spillover effect coming in from these Far Eastern devaluations,” said Diane Hirschberg, a director of foreign exchange sales at Bank of Montreal in New York.

“I think the Japanese are getting concerned about that, because they are major trading partners with other Far East countries and they are competing for exports to a certain extent,” she said. A weaker currency makes a country’s products less expensive overseas.

Traders also feared that weak export markets for Japan limit its option to raise interest rates if its economy improves, which would make yen investments more attractive.

In New York, the dollar topped 118 yen in intraday trading for the first time since falling more than 4% last week. It ended at 117.94 yen, up from 115.69 at Wednesday’s close.

Overseas, Tokyo’s Nikkei stock average rose 1.1%, Frankfurt’s DAX index fell 1.1% and London’s FTSE-100 fell 0.2%.

Market Roundup, D6