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U.S. Treasury securities sagged on Monday after the Fed released its manufacturing index for New York State. Strength in many of the report's components raised concern about strong economic growth and attendant inflation, which robs fixed-rate assets of their value. Traders also cast a wary eye on oil prices, which moved to the upside early before easing and finally closing down 59 cents at $66.27 a barrel. The price of oil is a concern to the financial markets, but one with two faces for bond traders. On one hand, they believe high oil prices will stifle economic growth, which will keep Fed rate hikes 'measured.' But, they also see high oil prices as inflationary - a negative for bonds. Although prices of Treasuries fell and yields, which move in the opposite direction of prices, edged up a couple of ticks, mortgage rates held near previous levels.

The NY Empire State index of August manufacturing conditions crept down to 23 from 23.9, but it was stronger than the 20 that was forecast, giving Treasury traders a jolt. But the worst news was inside the report, which showed a big increase in new orders and a jump in employment to 10.2 from 1.4. Prices-paid, a precursor of future inflation, also rose sharply.

Housing news was mixed, with the National Association of Realtors reporting an annualized home price increase of 13.6 percent over the past year (ended June 30), and a median home price (half cost more/half cost less) of $208,500. Of the 149 areas surveyed, 67 recorded double-digit increases over the past year, with Phoenix at the top of the chart. On the other hand, a survey released by the National Home Builders Association showed confidence among builders dropping for the second straight month due to higher mortgage rates. The index, however, came in at 67, which indicates favorable growth - as does any number above 50.

Stock Close Up as Oil Moves Down

Stocks managed gains on Monday due to a slide in oil prices and some positive corporate news. Lowe's, the number-two home improvement company behind Home Depot, beat sales and earnings estimates and boosted guidance, adding 1.3 percent in the process. And Apple was named the top recommended large cap for 2005 by a brokerage, sending it up 4 percent. Agilent, a giant in scientific testing instruments, announced it was restructuring and would sell-off peripheral businesses and concentrate on its core. Shares rose 14.6 percent and gave a lift to stocks as a whole.

Merrill Lynch reordered its portfolio, stating that it was raising its cash allocation and lowering its stock allocation. This is the first shift in two years for the brokerage. And Delta airlines slid 13 percent on word that it may be aligning its ducks for a bankruptcy filing.

The Dow Jones Industrials had no big swings one way or the other, and volume was low. Of the 20 components that closed positive, only five added more than 1 percent, led by Disney and Honeywell, which gained in the 1.5-percent range. Of the 10 components closing negative, only Exxon and Alcoa suffered losses of more than 1 percent.

In percentage gains the Nasdaq composite came out on top, but the tech bellwethers did not support the index. Of the seven that closed up only Qualcomm posted a healthy gain, adding 1.67 percent. Two were flat and the others showed minimal increases. Sun Microsystems gave up Friday's gain and more, falling 2.08 percent. Dell, Cisco Systems and Oracle each posted modest losses.

At closing:

The Dow 30 Industrial Index rose 34.07 points or 0.32 percent to 10,634.38; the Nasdaq Composite index was up 10.14 points or 0.47 percent at 2,167.04, and the benchmark Standard & Poor's 500 Index climbed 3.48 points or 0.28 percent to close at 1,233.87.

The 30-year Treasury bond was down 14/32 in price with the yield rising to 4.47 percent versus 4.45 percent at Friday's close.

The 10-year Treasury note was down 9/32 in price with the yield rising to 4.27 percent versus 4.25 percent at Friday's close.

The 5-year Treasury note was down 6/32 in price with the yield rising to 4.15 percent versus 4.12 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 5.66 percent from 5.674 percent at Friday's close.

The 15-year Conventional Fixed-Rate Mortgage was at 5.284 percent from 5.28 percent at Friday's close.

Coming Up

There are several economic reports due on Tuesday, but all eyes will be on the July Consumer Price Index (CPI), which checks for inflation at the retail level. Analysts expect the CPI to increase by 0.4 percent, but the core rate, which excludes volatile food and energy prices, to rise by a benign 0.2 percent. Numbers higher than these would send up a yellow flag warning of inflation.

Other reports on the docket include Housing Starts/Building Permits for July, which provide the first look at the housing industry. Forecasts show housing starts at an annual rate of 2.01 million units, which is close to the 2.004 million posted in June. Building permits are also expected to remain stable at 2.11 million, which is just a hair up from June's 2.10 million. Industrial Production for July is regarded as an indicator of manufacturing activity. Estimates are for a 0.6 increase in production, and 80.4 percent for capacity utilization - the number of mines, factories and utilities in full production. These are below June's production gain of 0.9 percent but above the 80.0 percent capacity.

The relatively small change in Treasury yields on Monday should allow mortgage rates, which are based on yields, to hold into Tuesday morning. After that the results of the CPI should rule.

Carolyn Siegel

carolyn@interest.como

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