Billerica Condominiums

A big jump in the Producer Price Index (PPI) for July coupled with a sharp drop in oil prices Wednesday spurred selling in U.S. Treasury securities. The possibility of inflation loomed large after the release of the PPI and the stifling effect of high oil prices on the nation's economy lessened, confronting bond traders with their worst fears. Inflation is an enemy of bonds, as it erodes the value of fixed-rate assets, especially long-term debt. But high oil prices recently have been viewed as bond-supportive because they act as a drag on the economy, which traders figure could slow growth to the point that the Fed would back off of its rate-hike campaign. Aggressive selling sent Treasury prices plunging and their yields, which move in the opposite direction of prices, climbing. Although yields returned to Monday's levels, mortgage lenders who base their rates on yields left them basically unchanged.

The PPI, which checks for inflation at the wholesale level, shocked the financial markets by climbing 1 percent - double forecasts. Rising energy costs were a big part of the increase, but the price of food fell again. And the core rate, which eliminates volatile food and energy prices, rose 0.4 percent - far above expectations for a 0.l-percent increase and far stronger than the negative 0.1 percent reading in June. The increase in the core rate is the biggest since January. On a year-over-year basis, the core is up 2.8 percent, which is the strongest move since 1995.

The slide in the price of oil resulted in more questions than answers. After an initial early creep up, crude oil prices plunged 4.28 percent on the day to close at $63.25. This was all the more surprising in the wake of the Energy Information Administration weekly report that showed a 5-million-barrel draw down in gasoline, a smaller-than-expected inventory of crude and an increase in distillates, i.e., heating oil. Although the drop in oil prices worried bond traders, it energized Wall Street, which sold off on Tuesday over concern that high oil prices would dent consumer spending. This fear was brought to light by Wal-Mart, which blamed the high price of oil for a decline in second-quarter sales.

Stocks Rally as Oil Prices Fall

Although stocks closed well off their highs of the session, they managed gains thanks in part to stellar earnings from Hewlett-Packard, Applied Materials and Nordstrom. H-P topped earnings and revenue estimates, supported a number of other tech stocks, and added 13.2 percent on the session. AppMat beat on earnings and raised guidance, and was rewarded with a 6-percent gain. Upscale retailer Nordstrom bucked Tuesday's downward slide in the sector, coming up with a 10-percent increase.

Dow Jones Industrials had more winners than losers, but aside from H-P, gains were slim. McDonald's added 2 percent and Boeing and Honeywell were up more than 1 percent, but other increases were modest. Losses were moderate, with only Exxon and Alcoa posting declines of more than 1 percent.

Hewlett-Packard's earnings countered disappointing reports from Gateway, Dell and Cisco Systems earlier this week, and lifted other big-cap techs. But the increase in the Nasdaq was not reflected by the tech bellwethers. JDS Uniphase posted a 3.3-percent gain and Cisco rose 1.2 percent, but others held near unchanged. On the downside, two of the four that closed negative suffered big hits. Ericsson fell 1.8 percent and Sun Microsystems was off 1.6 percent.

At closing: The Dow 30 Industrial Index rose 37.26 points or 0.35 percent to 10,550.71; the Nasdaq Composite index was up 8.09 points or 0.38 percent at 2,137.06, and the benchmark Standard & Poor's 500 Index slid 14.53 points or 1.18 percent to close at 1,245.15.

The 30-year Treasury bond was down 30/32 in price with the yield rising to 4.47 percent versus 4.41 percent at Tuesday's close.

The 10-year Treasury note was down 16/32 in price with the yield rising to 4.27 percent versus 4.20 percent at Tuesday's close.

The 5-year Treasury note was down 5/32 in price with the yield rising to 4.13 percent versus 4.08 percent at Tuesday's close.

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

The 30-year Conventional Fixed-Rate Mortgage was at 5.651 percent from 5.635 percent at Tuesday's close.

The 15-year Conventional Fixed-Rate Mortgage was at 5.272 percent from 5.244 percent at Tuesday's close.

Coming Up

Thursday features three economic reports, and two have market-moving capabilities. Weekly first-time unemployment claims for the week ended August 12 are out first, and if they come in much above or below the 310,000 estimate there could be repercussions. The other influential report is the Philly Fed index of August manufacturing conditions in the Mid-Atlantic region. Analysts are expecting the index to rise to 14.5 from the July reading of 9.6. The Index of Leading Indicators, which looks at the economy three to six months down the road, is relatively unimportant. An increase of 0.1 percent is forecast, which is a sharp drop from the 0.9 percent gain posted in June.

Overnight and into Thursday mortgage rates could creep up due to today's increase in yields, but rates on most products should hold close to unchanged.

Carolyn Siegel

carolyn@interest.com

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