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For the tenth consecutive time since June 30, 2004, the Federal Open Market Committee raised the target rate on fed funds - the rate banks charge each other for overnight loans - by 25 basis points to 3.5 percent. This move came as no surprise, as it was fully expected by the financial markets.

The statement that accompanied word of the rate hike was similar to previous statements. The Fed stated that spending was up and the labor market had improved, but core inflation has been controlled and said longer-term inflation remains well-contained. The Fed also stated again that it would remove accommodation at a pace that is likely to be measured, i.e., it will continue with it 25-basis-point rate hike program.

Mortgage Rates Continue to Edge Up
Submitted Aug 8 2005 5:43PM CST

Concern about Tuesday's Fed statement that will accompany its expected hike in short-term interest rates, plus relentless escalation in oil prices, kept pressure on U.S. Treasury securities and stocks on Monday.

There is little mystery about what the Fed will do about interest rates tomorrow. The tenth consecutive 25-basis-point increase since June 30, 2004, is all but a 'done deal.' Many Fed watchers are not expecting the statement to change in any significant way, but with oil prices soaring and wages climbing, others feel the Fed could signal a more aggressive stance.

Although Monday's trading volume was light, with no economic data to influence the financial markets, selling sent Treasury prices down and their yields, which move in the opposite direction of prices, up another few basis points. The big rise in yields on Friday paired with today's increases kept upward pressure on mortgage rates, which generally move in sync with yields.

New Record-High Oil Prices Trip Up Equities

Stocks opened in positive territory on Monday but another spike in oil prices turned them around. Oil closed near $64 a barrel, with a fire at a Sunoco refinery, problems at Conoco Phillips, and the closing of the U.S. Embassy in Saudi Arabia due to security threats all weighing on traders. In addition, there are concerns about terrorist strikes at Saudi oil fields.

Although only six Dow Jones Industrials closed in positive territory, losses were moderate to slim. Microsoft -- down 2.3 percent -- and DuPont were the only two to drop more than 1 percent on the day. McDonald's added 2.7 percent after topping both global and U.S. sales estimates, and Alcoa and Exxon each rose more than 1 percent. Alcoa benefited from a bullish article in Barron's over the weekend. Homebuilders suffered through another tough session, as rising mortgage rates could take a bite out of new home sales.

The price of oil also sent the Nasdaq composite down, after holding positive most of the morning. Concerns about inflation and the erosion of corporate profits are keeping the pressure on. There was merger talk in the tech sector, but no deals. The Finnish phone giant denied a report that Cisco Systems is interested in buying Nokia. Another report has Yahoo! mulling a partial buy of Alibaba.com, a Chinese e-commerce business. This news sent Yahoo! shares up1.25 percent - the second biggest gainer of the tech bellwethers. JDS Uniphase posted a huge increase - 5.37 percent, while other gains were small. Of the five bellwethers to close negative, Microsoft was the only one with a significant loss. Chips, as a sector, also remained under pressure.

At closing:

The Dow 30 Industrial Index fell 21.10 points or 0.20 percent to 10,536.93; the Nasdaq Composite index was down 13.52 points or 0.62 percent at 2,164.39, and the benchmark Standard & Poor's 500 Index slid 3.29 points or 0.27 percent to close at 1,223.13.

The 30-year Treasury bond was down 30/32 in price with the yield rising to 4.60 percent versus 4.58 percent at Friday's close.

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

The 5-year Treasury note was down 7/32 in price with the yield rising to 4.28 percent versus 4.23 percent at Friday's close.

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

The 30-year Conventional Fixed-Rate Mortgage was at 5.741 percent from 5.699 percent at Friday's close.

The 15-year Conventional Fixed-Rate Mortgage was at 5.344 percent from 5.28 percent at Friday's close.

Coming Up

The big news on Tuesday will be the Fed decision on interest rates and the accompanying statement, but prior to that there will be a couple of reports - one of which could move the markets. Productivity and Costs for the second quarter will be released and the cost portion of the indicator will be combed for signs of wage inflation, which are occurring a little more regularly. Productivity is expected to rise 2 percent, after gaining 2.9 percent the previous quarter. A consensus on costs is not available.

Also due is June wholesale inventories and sales - usually a low-impact report. Inventories, however, are expected to come in at 0.2 percent, which would be just a tad higher than the 0.1 percent increase registered in May. Increasing yields on Treasuries are forcing mortgages lenders to raise rates and there is nothing on the horizon that is likely to push them down until later this week.

Carolyn Siegel

carolyn@interest.com

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