Newton Condominiums

U.S. Treasury securities attracted buyers early in Tuesday's session when the Producer Price Index (PPI) for October was benign and Retail Sales lacked fire. But it was the testimony of Fed Chairman nominee Ben Bernanke before the Senate Banking Committee that sparked the biggest rally Treasuries have seen in a while. His stated mission to keep fighting inflation while keeping employment and economic growth strong was welcomed by traders as a promise to continue present policy. In other words, it offered no surprises.

Prices of Treasuries climbed and their yields, which move in the opposite direction of prices, fell. Although yields, which lenders use as a guide to set mortgage rates, did tick down, the move was not substantial enough to affect rates in any meaningful way.

Economic Indicators Favor Treasuries

The PPI, which tracks inflation at the wholesale level, was both higher and lower than forecast. Producer prices rose 0.7 percent last month, topping the estimated 0.1 percent increase. But the core rate that eliminates volatile food and energy prices fell 0.3 percent, when a 0.2 percent increase was expected. This was the steepest one-month decline in the core since April 2003. Prices were up in plastics and building materials (Katrina related), and heating oil rose 20 percent. But oil and gas prices declined and the core, which the Fed and other pundits rely on to gauge inflation, left traders feeling relieved that pressures for higher prices are not mounting.

Retail sales fell less than expected, edging down just 0.1 percent October - far less than the predicted 0.7 percent decline. Excluding auto sales, however, sales were up 0.9 percent, but a large part of that was due high prices at the pump. When gasoline prices were excluded retail sales came in flat. Although there were rumblings that strong apparel sales bode well for the holiday season, Wall Street reacted negatively to the report and bonds accepted the news without comment.

The only other report on tap showed the NY Empire State index on manufacturing conditions for November rising sharply. The index hit 22.8, climbing from its previous 12.1 reading, and surpassing the forecast for 15. Reaction to the report was muted, however, as the markets wait for the more influential Philly Fed survey due Thursday.

Another decline in the price of oil failed to rally the equity markets. Oil slid 71 cents to $56.98 a barrel.

Stocks Suffer Slim Losses

Retail sales couldn't move the markets on Tuesday. In fact, the retail sector was under pressure for a good part of the session, along with financials and technology stocks. These sectors have showed strength during the recent rally, but many of them gave a little back as profit takers entered the picture. There were a few standouts, including the Dow's Johnson & Johnson, which added 3.8 percent on word that the previously announced deal to buy Guidant is likely to happen, and at a lower price. Guidant also benefited, gaining 8 percent on the day. IBM climbed 1.4 percent after its marketing director departed.

Amazon.com was added to the S&P 500, which is an automatic boost for any new S&P component. The mega-retailer saw its shares rise 4.5 percent, and separately, Applied Micro Devices rose 2 percent. On the other hand, Target offered a profit warning, adding to retail woes, while GM led the Dow in losses, falling 4.8 percent. Other big Dow losers included McDonald's and Pfizer, which fell 1.8 percent and 1.6 percent, respectively.

At 4:00 p.m. EST:

The Dow 30 Industrial Index fell 10.73 points (-0.10 percent) to 10,686.44; the Nasdaq Composite index closed down 14.21 points (-0.65 percent) to 2,168.74, and the benchmark Standard & Poor's 500 Index shed 4.70 points (-0.38 percent) to 1,229.01.

The 30-year Treasury bond rose 25/32 in price with the yield falling to 4.74 percent from 4.80 percent on Monday.

The 10-year Treasury note gained 12/32 in price with the yield falling to4.56 percent from 4.60 percent on Monday.

The 5-year Treasury note was up 6/32 in price with the yield falling to 4.50 percent from 4.54 percent on Monday.

At 4 p.m. EST on Monday, AVERAGE mortgage rates (zero discount points) based on rates collected nationwide were:

The 30-year Conventional Fixed-Rate Mortgage was at 6.118 percent versus6.128 percent on Monday.

The 15-year Conventional Fixed-Rate Mortgage was at 5.660 percent compared with 5.676 percent on Monday.

Coming Up:

On Wednesday there is more inflation data with the release of the October Consumer Price index (CPI), which tracks prices at the retail level. Increases are expected to be modest, however, with CPI forecast to rise by a mild 0.1 percent. The core rate, which eliminates volatile food and energy prices, is seen edging up by an acceptable 0.2 percent. In October the CPI rose 1.2 percent, but the core edged up by a tiny 0.1 percent. If tomorrow's numbers come in on target, they could support Treasuries, while stronger numbers would not.

Also set for release is Business Inventories for September, which are expected to increase 0.3 percent, as opposed to a 0.5 percent increase the previous month. This data, however, has only mild impact on the financial markets.

If the CPI is tame Treasuries could extend today's rally and send yields even lower. But signs of inflation could push them back up. Unless there is strong movement one way or another, mortgage rates are likely to hold near present levels.

Carolyn Siegel

carolyn@interest.com

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