Bonds, Stocks Rally as New Reports Show Low Inflation

Bonds staged their biggest rally in six months Thursday, sending stocks soaring again, after new economic data showed strong growth yet subdued inflation.

The reports provided more evidence that the “Goldilocks” economy--wherein everything is just about right as far as investors are concerned--remains intact.

On Wall Street, the Dow Jones industrial average surged 111.85 points, or 1.3%, to 9,063.37, pacing a broad market advance.

Bond yields, meanwhile, fell sharply. The bellwether 30-year Treasury bond yield dove to 5.94% from 6.07% on Wednesday--erasing a big jump in yields Monday, when a Wall Street Journal report said the Fed decided in March to lean toward tightening credit in coming months.

With Thursday’s reports showing brisk first-quarter growth yet lower-than-expected inflation, the Fed is almost certain to leave short-term interest rates unchanged in the near term, many economists said.

“Investors got the green light to buy,” said Hugh Whelan, who manages $6 billion of bonds at Aeltus Investment Management in Hartford, Conn. He purchased 10-year Treasury bond futures contracts and older 30-year bonds, and said T-bond yields may fall as low as 5.65% in coming months.

“These are excellent numbers for the market,” said Andrew Brenner, head of global fixed-income trading at Fimat USA Inc. “How can the Fed even lean toward tightening when we have no inflation?”

Tumbling yields on shorter-term Treasury issues suggested the fear of a Fed tightening was indeed waning markedly Thursday. The yield on the two-year T-note dropped from 5.71% on Wednesday to 5.57%, lowest since April 20.

A report from a Chicago-area manufacturing trade group indicating slowing activity in April also helped bonds. A national report on April manufacturing activity will be released today.

Stocks rallied at the outset of trading Thursday as yields slid. By the close, winners outnumbered losers by 2,358 to 744 on the New York Stock Exchange and by 2,698 to 1,575 on Nasdaq. Trading was heavy, with 706 million shares changing hands on the NYSE, the most in more than a month.

With Thursday’s rebound, the Dow over the last two sessions has recouped all of its Monday decline, when it sank almost 147 points on Fed jitters.

Still, the Dow retreated from its best levels of the day. It traded as high as 9,128. The index remains 121.57 points, or 1.3%, below its record high of 9,184.94 set last week.

The Nasdaq composite index jumped 16.77 points, or 0.9%, to 1,868.41. It had traded as high as 1,874.46.

The Standard & Poor’s 500 index surged 1.6% to 1,111.75.

Among Thursday’s highlights:

* Classic consumer growth stocks led the charge, including Coca-Cola, up $2.19 to $75.88; McDonald’s, up $2.56 to $61.88; Johnson & Johnson, up $2.31 to $71.50; and Merck, up $4.50 to $120.50.

* Many food stocks also gained, with Campbell Soup up $2.31 to $51.31 and Keebler Foods up $2.06 to $28.50.

* Utility stocks, which have sunk in recent weeks on worries about higher interest rates, rebounded sharply. The Dow utility index gained 2.2% to 284.47.

* Falling rates also helped many financial stocks. Wells Fargo jumped $13.38 to $368.50, Norwest gained $1.06 to $39.88, NationsBank rose $2.19 to $76 and SunAmerica jumped $2 to $49.94.

But home builders, which were slammed early in the week as bond yields rose, failed to attract buyers Thursday. Kaufman & Broad inched up just 6 cents to $29.25; Centex was unchanged at $34.75.

* Retailers, beneficiaries of the healthy consumer spending trend in the economy, were hot again. Sears jumped $1.50 to $59.31, Dayton Hudson leaped $2.69 to $87.31, Mercantile Stores surged $3.63 to $73.06, Gap shot up $3.50 to $51.44 and Home Depot gained $2.38 to $69.69.

* Among industrial issues that benefit from strong economic growth, GE surged $2.88 to $85.19, Inland Steel rose $1.56 to $29.31 and Cincinnati Milacron gained $1.13 to $31.06.

In foreign trading, European and Latin American markets were broadly higher with Wall Street. The French market rocketed 3.9%, while British stocks gained 1.6%. The Mexico City market rose 1.4%.

Asian markets were mixed.

Market Roundup, D5

* WHAT ASIA?: The U.S. economy surges ahead despite Asia’s woes, while inflation sputters. A1