Inflation Data Spur Stocks Higher as Bond Yields Skid

U.S. stocks staged a powerful rally Tuesday as falling interest rates, coupled with mounting optimism about corporate profits and negligible inflation, produced more record highs on most major indices.

The Dow Jones industrial average ended up 53.11 points at 6,762.29, its fourth straight record finish and sixth high of the year.

Stocks got an early boost when key economic indicators for December confirmed that inflation remains at bay.

The Labor Department’s consumer price index “core rate,” which excludes food and energy costs, rose only 0.1%, triggering a big rally in bonds that sent interest rates falling and gave stock traders a green light to buy.

In the bond market, the benchmark 30-year Treasury bond gained a full point, cutting its yield to 6.76% from 6.85% at Monday’s close.

“We had lot of reports today, but most traders were hanging their hats on the CPI,” said Robert Froehlich, chief investment strategist at Van Kampen American Capital.

Bond prices had tumbled over the last two weeks, sending interest rates soaring, amid fears that the pace of business hasn’t slowed enough to keep a lid on inflationary pressures such as rising production costs.

Last week’s news of a big jump in new jobs during December had aggravated those worries, but stocks rebounded as investors remained confident that inflation won’t rise enough to force a profit-choking interest rate increase by the Federal Reserve Board. Tuesday’s consumer price report bolstered that confidence.

“Every threat to the rally has been met and overcome, the most recent being the ratcheting up of interest rates in the bond market,” said Joe Battipaglia, chief investment strategist at Gruntal & Co. “We saw very strong employment numbers early last year, but they never did yield the inflation people were worried about, so why worry about it this time?”

Although the inflationary impact of rising energy prices on manufacturing and shipping costs remains a concern, analysts said the continuing stability in consumer prices makes it unlikely the Fed will soon start raising its key lending rates to slow borrowing and spending.

Rising inflation or interest rates make existing bonds less attractive, forcing down prices to improve the yield. Higher interest rates can hurt stocks by slowing revenues and raising operating costs.

The Commerce Department also reported Tuesday that retail sales rose just 0.6% in December. But the increase was slightly higher than the 0.4% forecast of many analysts and erased a 0.2% dip of a month earlier.

Advancing issues outnumbered decliners by an 11-5 margin on the New York Stock Exchange.

Also setting new highs were the Standard & Poor’s 500 index, up 9.35 points to 768.86; the NYSE composite index, up 4.36 points to 405.07; the Nasdaq composite index, up 15.45 points to 1,346.36; and the Russell 2,000 list of smaller companies, up 1.67 points to 367.52. The American Stock Exchange composite index rose 2.22 points to 588.35.

Among Tuesday’s highlights:

* Semiconductor shares were prominent in the day’s dealings. Advanced Micro Devices jumped 3 1/2 to 32 1/2 after reporting a smaller-than-expected fourth-quarter loss.

Intel rose 1/4 to 147 1/8 after climbing as much as 2 7/8 in advance of the chip maker’s widely anticipated earnings report.

Adding to the optimism that Intel’s report would justify beliefs that computer demand is growing were suggestions by a Salomon Bros. analyst that CompUSA has enjoyed an encouraging rebound after a bumpy holiday season. The computer retailer’s shares surged 3 1/2 to 17 5/8.

Among other bellwether technology issues, IBM surged 3 9/64 to 167 1/64 as as the Dow’s biggest gainer, while Cisco Systems rose 3 to 72 1/8, Dell Computer rose 4 1/4 to 65 3/8 and Gateway 2000 surged 4 to 56.

* Falling interest rates boosted banks and other financial firms. J.P. Morgan rose 2 to 104 1/2 and Citicorp jumped 3 3/4 to 104 1/4.

* Bucking the bullish trend were the shares of health maintenance organizations, which slipped on fears that the U.S. will move to slow the growth rate of their premiums.

Oxford Health Plans fell 2 3/4 to 52 5/8 and United Healthcare lost 3/4 to 43 5/8.

* Payless ShoeSource jumped 2 3/8 to 37 after announcing it would acquire J. Baker’s Parade of Shoes unit for undisclosed terms. Payless also said it plans to buy back up to $150 million in stock. J. Baker rose 13/16 to 6 7/8.

* Netscape Communications skidded 4 1/2 to 42 1/4 after Merrill Lynch expressed caution about the company’s outlook.

Overseas, Tokyo’s Nikkei stock average fell 0.1%, Frankfurt’s DAX index fell 0.2%, and London’s FTSE-100 rose 1.5%.

Market Roundup, D6