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Anxiety over upcoming economic reports on inflation and consumer spending had bond traders adopting a 'wait-and-see' attitude on Wednesday, but the bias was negative. U.S. Treasury securities were victims of light selling in the wake of a shrinking trade deficit, but losses were muted pending the outcome of reports on Retail Sales and the Consumer Price Index for June - both due before the markets open on Thursday. Upward pressure on Treasury yields, which move in the opposite direction of prices, has forced mortgage lenders to increase rates on some mortgage products, and others are likely to follow.

The U.S. trade balance shrank to $55.3 billion in May from an upwardly revised $56.9 billion in April. The deficit also came in below forecasts of $56 billion. Although the dollar strengthened against the yen and the euro on the news, it also raised concern among traders that increased exports would contribute to second-quarter Gross Domestic Product, which would keep the Fed in a credit-tightening frame of mind. A drop in oil prices in May was credited for the lower trade deficit. In a separate release, import prices rose in June by 1.0 percent, but when oil was excluded prices came in at a minus 0.4 percent. Export prices remained unchanged, but fell 0.1 percent when agricultural products were excluded.

Dow Jones Industrials Set the Pace

The Dow Jones Industrials closed at a three-week high on Wednesday, while the Nasdaq and S&P 500 ended close to unchanged. Twenty-four Dow components landed in positive territory, with several posting gains of more than 1 percent, but no one corporation was the clear leader. A diverse group of six components - Altria, Hewlett-Packard, McDonald's, Procter & Gamble, Disney and IBM - each added more than 1 percent, with IBM boosted by an upgrade. The six components closing in negative territory registered losses of less than 1 percent.

The price of oil fell after the Oil Information Administration released its weekly inventory report showing an increase in distillates, used for heating oil. Although inventories of crude and gasoline fell, crude inventories remain at the upper end of the average range and gas is in the upper one-half of its range. Oil fell 61 cents to end at $60.01 a barrel.

The Nasdaq composite closed positive for the fifth straight session, but just barely. The tech-heavy index bobbed in and out of positive territory nine times on Wednesday, but managed to eke out a gain. One stock weighing on the index was Majesco Entertainment, a creator of video games, which fell almost 50 percent after warning that its estimates for the entire year will fall short. Several big-caps listed in the tech bellwethers gained more than 1 percent: JDS Uniphase, IBM, Yahoo!, Oracle and Dell. Three others also posted small gains. Those ending in negative territory included Qualcomm, Ericsson and Intel.

At closing: The Dow 30 Industrial Index rose 43.50 points or 0.41 percent to 10,557.39; the Nasdaq Composite index was up 0.96 points or 0.04 percent at 2,144.11, and the benchmark Standard & Poor's 500 Index gained 1.08 points or 0.09 percent to close at 1,223.29.

The 30-year Treasury bond was down 7/32 in price with the yield rising to 4.39 percent versus 4.38 percent at Tuesday's close.

The 10-year Treasury note was down 4/32 in price with the yield rising to 4.16 percent versus 4.14 percent at Tuesday's close.

The 5-year Treasury note was down 2/32 in price with the yield rising to 3.95 percent versus 3.93 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 5.497 percent from 5.466 percent at Tuesday's close.

The 15-year Conventional Fixed-Rate Mortgage was at 5.07 percent from 5.049 percent at Tuesday's close.

Coming Up

Thursday is the day everyone has been waiting for because there are two economic reports due that could define the nation's economic footing. Retail Sales for June, which monitor consumer spending - a key to the nation's economic health - are expected to rise by a healthy 0.9 percent, which would be a big improvement after May's negative 0.5 percent reading. Excluding auto sales, sales are forecast to increase 0.6 percent, also an improvement from the minus 0.2 percent posted in May. The June Consumer Price Index is expected to increase by a benign 0.2 percent, as is the core index, which excludes volatile food and energy prices. These would be slightly higher than the 0.1-percent decrease and the 0.1-percent increase in the core registered in May.

First-time unemployment claims for the week ended July 7 are also set for release, with analysts expecting them to rise by 6,000 to 325,000. If all the reports come in on target, Treasury traders could be reassured that inflation is under control but would be concerned about the increase in consumer spending. The push and pull of these reports might keep Treasuries on an even keel and mortgage rates could follow.

Carolyn Siegel

carolyn@interest.com

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