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Benign economic news ignited strong buying in U.S. Treasury securities on Tuesday. Concerns over both inflation and strong economic growth evaporated as a batch of economic indicators pointed down. Even the fed funds futures that forecast the probability of interest-rate hikes by the Fed, backed down from the December 'sure thing' to about a 50-50 chance that one will occur. Treasuries may also have benefited from safe-haven buying as Wall Street was trounced by concerns about oil. Treasury prices soared and their yields, which move in the opposite direction of prices, fell to levels not seen since the end of July. Lower yields, which lenders use as a guide to set rates, did not influence mortgage lenders to lower rates today. Mortgage rates, however, have fallen about one-eighth of a point on some fixed-rate products from their four-month highs of last week.

The Consumer Price Index (CPI) for July rallied traders. Although the CPI rose 0.5 percent, which was higher than the 0.4 percent increase and way up from the unchanged reading in June, the core rate, which excludes volatile food and energy prices, rose only 0.1 percent. This equaled the June increase, but was below estimates for a 0.2 percent rise. The price of oil was the main reason for increases, which led to higher costs for gas and transportation. Food prices held steady while apparel costs edged down.

Industrial Production in July also missed forecasts, rising only 0.1 percent - down from the June reading of a 0.8 percent increase, and below forecasts for 0.5 percent growth. Hurricane-related mine shutdowns were responsible for some of the decline. Capacity Utilization - the percent of mines, factories and utilities in full production - edged down to 79.7 percent from the previous revised 79.8 percent. A surge in utilities countered the downturn in mining.

Housing Starts and Building Permits for July were just above expectations. Housing starts edged down 0.2 percent to an annual rate of 2.042 million units from a revised 2.045 million in June, with starts for single-family homes setting the pace. Permits, an indication of future starts, hit their highest level in 32 years, rising 1.6 percent to an annual rate of 2.17 million from 2.13 million in June.

Wal-Mart, Gateway Sink Stocks

Disappointing earnings from Wal-Mart sent a shudder through the retail sector that spelled doom for the equity markets on Tuesday. The retail giant said the price of gas cut into second-quarter sales and carved out a portion of its operating profits due to increased trucking costs. The report not only sent Wal-Mart stock down 3.1 percent, but also hurt shares of other retailers that had posted good earnings. Among those with bullish reports that closed in negative territory were JC Penney, Home Depot, and Staples. Other big retailers, such as Sears and Costco fell in sympathy. Separately, John Deere reported that earnings were down due to the severe drought in the Midwest and competitor Caterpillar fell as well.

All but four Dow Jones components closed in negative territory. Altria, Citigroup, Disney and Verizon bucked the trend, but gains were modest. Wal-Mart was the Dow's biggest loser, but Intel, Honeywell, Exxon and Caterpillar lost more than 2 percent each and another 10 components shed upwards of 1 percent. Although the price of oil and its possible effect on the economy was a major factor in today's trading, the actual price of oil fell 19 cents to close at $66.08 a barrel.

PC maker Gateway put pressure on the tech sector. Although it reported stronger earnings and revenues, it downwardly revised its full-year earnings, hurting a host of other companies, such as Sun Microsystems, Qwest, Qualcomm and Intel. Although the three major indexes all lost more than 1 percent, the Nasdaq led them all, dropping almost 1.4 percent on the session. Only two tech bellwethers managed gains - Dell and Oracle - and those were small. Qualcomm and Ericsson lost more than 2 percent each, while IBM, Microsoft, JDS Uniphase and Yahoo! each shed more than 1 percent.

At closing:

The Dow 30 Industrial Index fell 120.93 points or 1.14 percent to 10,513.45; the Nasdaq Composite index was down 29.98 points or 1.38 percent at 2,137.06, and the benchmark Standard & Poor's 500 Index slid 14.53 points or 1.18 percent to close at 1,219.34.

The 30-year Treasury bond was up 1-4/32 in price with the yield falling to 4.41 percent versus 4.47 percent at Monday's close.

The 10-year Treasury note was up 20/32 in price with the yield falling to 4.20 percent versus 4.27 percent at Monday's close.

The 5-year Treasury note was up 12/32 in price with the yield falling to 4.08 percent versus 4.15 percent at Monday's close.

AVERAGE mortgage rates (zero discount points) based on rates collected nationwide were:

The 30-year Conventional Fixed-Rate Mortgage was at 5.635 percent from 5.66 percent at Monday's close.

The 15-year Conventional Fixed-Rate Mortgage was at 5.244 percent from 5.284 percent at Monday's close.

Coming Up

The only report due on Wednesday is the July Producer Price Index (PPI), which checks for inflation at the wholesale level. Analysts expect the PPI to increase by 0.6 percent, but the core rate, which excludes volatile food and energy prices, to rise by a tame 0.2 percent. There may be a little less anxiety over the PPI because its release usually precedes the CPI and can foretell the results. But this will not happen this month. Nevertheless, the report will be scrutinized for signs of inflation, which could find their way to the retail level.

Mortgage lenders probably welcomed the decline in Treasury yields on Tuesday, but it is unlikely that they fell far enough to warrant any significant rate changes. Overnight and into Wednesday rates should hold fairly steady.

Carolyn Siegel

carolyn@interest.com

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