Stocks Soar on Drop in Prices, Then Retreat

Stocks and bonds rallied sharply 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 Jones industrial average finished the day 14.80 points higher at 3,889.95.

In the bond market, the yield on the Treasury’s bellwether long-bond dropped to 7.85% from Wednesday’s 7.90%. Its price, which moves in the opposite direction, was up nearly a point in early trading, but fell back later in the day to close up 19/32 point, or $5.94 per $1,000 in face value.

The impetus for the early gains was a government report that producer prices fell a surprising 0.5% in September, the lowest reading in more than a year. Economists had expected a 0.1% increase from the previous month.

Moderate increases in wholesale prices indicated that inflation is under control, causing investors to hope that the Federal Reserve Board will not have to increase short-term interest rates soon.

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

On Wall Street, advancing issues outnumbered decliners by nearly 3 to 2 on the New York Stock Exchange, where volume totaled 337.91 million shares, up from 270.34 million on Wednesday.

The NYSE’s composite index rose 1.08 to 257.43. The Standard & Poor’s 500-stock index rose 2.30 to 467.77. The Nasdaq composite index of mostly smaller issues rose 0.89 to 767.89. At the American Stock Exchange, the market value index rose 0.07 to 458.57.

But investors’ enthusiasm gradually faded as the focus turned to a raft of numbers due out today, including September consumer-price data, manufacturing production, and retail sales numbers. The Dow Jones industrial average spent all day posting solid two-digit gains, but lost ground late in the session as investors sold into Friday’s numbers.

Larry Wachtel, a Prudential Securities market analyst, said the consumer-price report should confirm Friday’s wholesale price data and suggest that price inflation is not rampant.

Wachtel said the capacity utilization data will be more important because they will give a forward reading on inflation. Analysts are concerned that if manufacturing plants are shown to be operating at 85% of capacity or higher, that could suggest that inflation may heat up in the future and prompt the Fed to tighten policy soon.

Capacity utilization hit 84.7% in August. Economists expect the September reading to be between 84.7% and 84.5%.

“The Fed’s not watching the current situation, but it’s trying to anticipate inflation in the future,” Wachtel said.

Earnings reports continued to provide a lift to many issues.

Among the market highlights:

* Hasbro Inc. gained 1 1/4 to 30 1/4 on the American Stock Exchange. Its third-quarter earnings beat Wall Street forecasts.

* Altera Corp. surged 5 5/8 to 33 5/8 on the Nasdaq market after it posted solid third-quarter earnings and strong sales.

* CBS Inc. sank 20 to 309 1/2. Prudential and PaineWebber downgraded the stock amid concern over CBS’s television ratings.

* Software maker Intuit Inc. leaped 3 1/4 to 50 1/4. It said it was in talks with Microsoft Corp. about a possible business combination. Microsoft rose 1 to 57 1/4.

* Three-Five Systems plunged 11 3/8 to 38 1/2 after saying that price pressure on some products will bring further reductions in its gross margins.

* Auto stocks dipped after Thursday’s September wholesale prices report pegged a decline in passenger car prices. Ford Motor fell 1/8 to 28 7/8; Chrysler, 1/2 to 46 1/4, and General Motors, 1/8 to 47 1/4.

Overseas stock markets rose, with London’s Financial Times 100-share average jumping 41.4 points to 3,141.9 and Frankfurt’s Dax-30 share average closing up 5.06 point at 2,082.63. In Tokyo’s Nikkei-225 average finished 59.11 points higher at 20,148.83.

Mexico City’s Bolsa index ended 18.79 points higher at 2,759.61.

In the currency markets, meanwhile, the dollar finished lower against most major currencies, faltering after a rally inspired by the favorable inflation data. The dollar closed in New York at 99.46 Japanese yen and 1.529 marks, down from 99.77 yen and 1.5410 marks, respectively.

Elsewhere, gold prices lost ground at home and abroad. On the Comex, gold for current delivery slid $1.90 an ounce to $386.10.