Belmont Condominiums

Buyers lined up for the second straight day to purchase U.S. Treasury securities. Another tame report on inflation and news of record capital flows put U.S. government debt at the top of everyone's 'must have' list for Wednesday. Prices on Treasuries climbed, sending their yields, which move in the opposite direction of prices, tumbling. In fact, the yield on the benchmark 10-year note fell below 4.5 percent for the first time since October 25. In spite of the slide in yields, which lenders use as a guide to set mortgage rates, rates held near recent levels.

Consumer Price Index Calms Inflation Fears

The October Consumer Price Index (CPI), which checks for inflation at the retail level, soothed traders' concerns about inflation, which erodes the value of fixed-rate assets. The CPI rose 0.2 percent, which was higher than the forecast for a flat reading, but much lower that the 1.2 percent gain in September. Although gas prices crept down, a big jump in natural gas and a hike in food costs put upward pressure on prices. But the core index, which eliminates volatile food and energy prices, rose by 0.2 percent, which was in line with forecasts but higher than the 0.1 percent increases posted for the previous five months. The benign data led traders to believe that the Fed would not stray from its 'measured' pace rate-hike program.

In a separate report, capital flowed into the U.S. at a record pace in September, beating estimates by a whopping 40 percent. Increased appetite for U.S. securities re-enforced the strength of investments in the U.S. and led to the flattening of the yield curve (the difference between the yields on the two-year and 10-year notes). A flat curve generally signals an economic slowdown, which could force the Fed to halt its rate-hike program. An inverted curve has often preceded recession. But today, mortgage watchers and Wall Street welcomed lower yields.

In a separate report, Ben Bernanke - the president's choice to succeed Alan Greenspan as chairman of the Federal Reserve - was recommended by the Senate Banking Committee. His nomination will come up for a vote by the Senate, presumably early in 2006.

Business inventories in September rose 0.5 percent, followed by sales, which climbed by a strong 0.6 percent. Estimates had inventories edging up by 0.3 percent. In addition, the inventory-to-sales ratio tightened to 1.25 months, indicating that production may need to be ramped up to fill dwindling supplies.

A surprise drop in inventories of crude oil - down 2.2 million barrels, according to the Energy Information Agency (EIA) - sent oil prices back up after several days of declines. Inventories of gasoline also dipped while heating oil reserves rose by 2.6 million barrels. The price of oil closed up 90 cents at $57.88 a barrel. Shares of oil and oil services companies also saw gains.

Stocks Tough It Out Again

Stocks struggled again on Wednesday, with the Dow Jones Industrials buried under the weight of another big loss by GM. The world's number-one carmaker fell 5.8 percent today after giving up 4.8 percent on Tuesday, as investors unloaded, burdened by fear of the company's economic troubles that could result in a filing for bankruptcy. GM's stock hit an 18-year low today and has lost 44 percent so far in 2005. American Express also took a dive after its CEO admitted that analysts' earnings estimates are too high. Its shares fell 1.8 percent, and Pfizer also weighed, dropping 2.4 percent.

The Nasdaq and S&P 500 managed to eke out gains, with strength coming from positive news from some Internet stocks and retailers, such as Talbots and Abercrombie & Fitch as well. Tyco added 4 percent when its earnings exceeded forecasts.

The National Association of Homebuilders released a survey showing confidence dropping to 60 in November from 68 the previous month (anything over 50 shows a plurality of homebuilders believe conditions are good). Although no one believes there will be a huge drop in activity, numbers showed that confidence slipped across the U.S., with the West (the hottest market) taking the biggest hit. Confidence slid to 78 from 91 the previous month. Builders believe that higher mortgage rates and increases in the cost of building materials are weighing on optimism. The survey is based on current sales, expectations for future sales, and foot traffic. This release put pressure on a number of homebuilders today, most of which trade on the NYSE.

At 4:00 p.m. EST:

The Dow 30 Industrial Index fell 11.68 points (-0.11 percent) to 10,674.76; the Nasdaq Composite index closed up 1.19 points (+0.05 percent) to 2,187.93, and the benchmark Standard & Poor's 500 Index added 2.20 points (+0.18 percent) to 1,231.21.

The 30-year Treasury bond rose 1-9/32 in price with the yield falling to 4.66 percent from 4.74 percent on Tuesday.

The 10-year Treasury note gained 21/32 in price with the yield falling to4.48 percent from 4.56 percent on Tuesday.

The 5-year Treasury note was up 12/32 in price with the yield falling to 4.42 percent from 4.50 percent on Tuesday.

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 6.099 percent versus6.118 percent on Tuesday.

The 15-year Conventional Fixed-Rate Mortgage was at 5.665 percent compared with 5.66 percent on Tuesday.

Coming Up:

The final economic releases of the week come out on Thursday, led by Housing Starts and Building Permits for October. Not only is this the first look at the housing industry for last month, but also it will be especially interesting in light of the NAHB index released on Wednesday. Analysts are expecting starts to dip to an annual rate of 2.6 million units from the 2.11 million mark posted in September, while permits are forecast to drop to an annual rate of 2.15 million from the previous 2.19 million.

Also on tap are first-time unemployment claims for the week ended Nov. 12. Claims should come in at 321,000 versus the 326,000 who applied for benefits the previous week. Industrial Production, a closely watched monitor of manufacturing activity, is expected to climb by 1 percent in October after falling 1.5 percent in September (Katrina influenced). Capacity Utilization is also expected to climb to 79.7 from its previous reading of 79. Another market-mover, the Philly Fed index of manufacturing conditions in November, is expected to remain near the 17.3 posted in October.

If economic reports come in on target and manufacturing numbers remain in line, Treasuries could hold near present levels, leaving mortgage rates to do the same.

Carolyn Siegel

carolyn@interest.com

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