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The Fed raised short-term interest rates by 25 basis points on Tuesday for the 10th consecutive time since June 30, 2004. This brings the target fed funds rate to 3.5 percent. The financial markets fully expected this decision but rallied in its wake when the Fed promised to remove accommodation 'at a pace that is likely to be measured.' This statement erased concern that the Fed might take more-aggressive action due to strong economic news and escalating oil prices.

'Aggregate spending, despite high energy prices, appears to have strengthened since late winter, and labor market conditions continue to improve gradually,' the Fed stated. It also noted that 'core inflation has been relatively low in recent months and longer-term inflation expectations remain well contained, but pressures on inflation have stayed elevated.' This somewhat bullish assessment of the economy paired with contained inflation and a promise to keep rate hikes measured was music to the ears of both stock and bond traders, who staged miniature rallies in the last hours of trading.

Treasury prices remained relatively flat prior to the announcement, but interested buyers moved in later, sending prices up and yields, which move in the opposite direction of prices, down. The late-session decline in yields had little effect on today's mortgage rates, which had edged up overnight and then held steady.

Economic News Well-Received by Markets

Weaker-than-expected second-quarter Productivity and Costs reassured the markets for one reason: there were no signs of inflation in wages. Productivity (the output of work per hour) rose 2.2 percent, which was less than the 2 percent forecast and less than first quarter results. Unit labor costs duplicated that picture, rising 1.3 percent - well below the estimated 2.75-percent increase and lower than first-quarter costs.

In a separate report, Wholesale Inventories increased 0.7 percent due almost solely to the build-up of autos. The increase beat estimates of 0.4 percent and outpaced upwardly revised May gains of 0.3 percent. Wholesale Sales also beat estimates, climbing 0.6 percent when an increase of 0.4 percent was forecast. This was a big improvement over the upwardly revised 0.1-percent gain in May. The price of oil also edged down today, giving Wall Street a lift.

Stocks Rebound After Series of Losing Sessions

Dow Jones Industrials bounced back after a string of losses, with 26 of the 30 components closing in positive territory. Disney was the big winner, gaining almost 3 percent prior to its earnings report. Alcoa rose just over 2 percent and Pfizer, Boeing, Merck and Home Depot, which had been beaten down due to the rise in mortgage rates, posted gains of 1.7 percent or better. An additional four gained more than 1 percent, and of the four components that closed negative, none lost even close to 1 percent.0

The Nasdaq got a boost from Cisco Systems, which rose prior to its earnings report, and Biogen, along with Elan, which trades on the NYSE, posted gains due to positive news on their treatment for Multiple Sclerosis. Chips, which had dragged the Nasdaq down over the past few sessions, also rebounded today. Cisco led the tech bellwethers with a 1.9-percent gain, followed by Ericsson, which added 1.7 percent. JDS Uniphase and Qualcomm were the only ones to close negative, with losses of 1.9 percent and 1.1 percent, respectively.

At closing:

The Dow 30 Industrial Index rose 78.74 points or 0.75 percent to 10,615.67; the Nasdaq Composite index was up 9.80 points or 0.45 percent at 2,174.19, and the benchmark Standard & Poor's 500 Index climbed 8.25 points or 0.67 percent to close at 1,231.38.

The 30-year Treasury bond was up 15/32 in price with the yield falling to 4.57 percent versus 4.60 percent at Monday's close.

The 10-year Treasury note was up 9/32 in price with the yield falling to 4.39 percent versus 4.42 percent at Monday's close.

The 5-year Treasury note was up 6/32 in price with the yield falling to 4.23 percent versus 4.28 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 5.77 percent from 5.741 percent at Monday's close.

The 15-year Conventional Fixed-Rate Mortgage was at 5.375 percent from 5.344 percent at Monday's close.

Coming Up

Today's big news day will be followed by a slow news day on Wednesday. The only report scheduled is the monthly budget from the Treasury. Analysts are expecting a negative $58 billion reading for June, which is somewhat better than the negative $69.2 billion posted in May. The report, however, has little impact on the markets, which will be focusing on Retail Sales for July due out Thursday.

The slight dip in Treasury yields will not likely send mortgage rates down overnight, but it should allow them to hold near current levels.

Carolyn Siegel

carolyn@interest.com

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