In late trading, the 10-Year Treasury Note was down by 5/32, raising its yield to 4.12%. It had been down by about half a percent earlier in the day (-16/32) with its yield up to 4.16% (yield moves inversely to price). The Dow gained 29.88 points on the day to 11,632.38 and the Nasdaq rose by 21.92 points to 2,325.88.

A stronger than expected oil inventories report and a lessening threat from Hurricane Dolly to oil operations in the Gulf of Mexico pulled futures prices lower. The price of a barrel of light, sweet crude oil for September delivery fell by $3.98 on the New York Mercantile Exchange to settle at $124.44. In the last seven sessions, the front month price has fallen six times for a net decline of $21.21. Today's close was the lowest since June 4.

Though the decline does not benefit the energy sector of the stock market, it helps the broader market since it leaves businesses and consumers with more money to spend elsewhere in the economy. By the end of stock trading, the Dow had gained 0.26%; the S&P 500, 0.41%; and the Nasdaq, 0.95%. Today's closing figures for the Dow and Nasdaq were the highest since June 25. The S&P 500's close was the highest since July 1.

Today's 2-Year Note auction drew mixed demand but was generally successful. Bids exceeded the $31 billion offer amount by 2.42 to 1, down from last month's bid-to-cover ratio of 2.64 and below the average of 2.60 for the twelve auctions preceding today's. But individual investor demand was strong. Noncompetitive bids totaled $823 million, the largest amount since last August. Even though the offer amount was exceptionally high this month, noncompetitive bids represented 2.7% of the issue, the largest percentage since last November.

Foreign demand was also strong. Indirect competitive bids, which include those from foreign central banks, received 35.8% of the issue, the highest award portion since April of last year.

Lastly, the Fed's latest edition of the Beige Book was released this afternoon but it did not contain any real surprises. The summary of economic conditions said, "Reports from the twelve Federal Reserve Districts suggest that the pace of economic activity slowed somewhat since the last report." While this suggests that the Fed may be hesitant to raise interest rates since that would further slow the economy, the threat of inflation argues for such a move. The summary said, "All reporting Districts characterized overall price pressures as elevated or increasing."

Of course, the recent decline in oil prices is seen as a release mechanism for some of that inflation pressure. (BEIGE BOOK)

Tomorrow brings the weekly jobless claims report. In last Thursday's report, the Labor Department said that the seasonally adjusted level of initial claims for state unemployment benefits rose by 18,000 the week before to 366,000. The increase was the largest in five weeks but it was not unexpected given the 56,000 drop in the preceding week.

The Independence Day adjustment factor is suspected to have contributed to the steep decline in the week ending July 5th. The four-week moving average for the week ending the 11th declined by 4,500 to 376,500.

Regardless of the recent gyrations, the trend remains up. For the first twenty-eight weeks of the year, the weekly average claims figure has been 362,357. For the same period last year, the average was 315,000.

The last report said that continuing claims for the week ending July 5 (continuing claims must be at least a week old) fell by 81,000 to 3.122 million. This was the largest drop since the first week of 2006 but it too was likely skewed by the holiday.

Like the initial claims data, the underlying trend in continuing claims is also is up. The four-week moving average rose by 16,500 to 3,142,750, the highest reading since mid-February of 2004. For the twenty-seven weeks of data this year, the average continuing claims reading has been 2,941,852. For the same period in 2007, the average was 2,511,407.

Many analysts feel that the latest increase in the initial claims figure was not enough to compensate for the holiday-distorted drop. Therefore, another increase is expected in last week's claims figure.

Also out tomorrow morning is the report on existing home sales for last month. In the last report, the National Association of Realtors said that the seasonally adjusted, annualized pace of existing home sales rose by 2.0% in May to 4.99 million from April's rate of 4.89 million.

Inventories of existing homes on the market slipped by 1.4% to 4.49 million (seasonally adjusted, annualized). At the prevailing sales pace this represents 10.8 months of supply, an improvement from April's turnover rate of 11.2 months. The median home price fell by 6.3% from its level a year earlier. Despite the increase in sales pace and decline in inventory, the data has not altered analysts' assessments that the housing sector remains weak.

A slight decline of 0.8% is predicted for June's sales pace, bringing it down to 4.95 million.

Tomorrow afternoon, the Treasury will be conducting its monthly auction of 5-Year Notes. Last month's had mixed results but overall demand was strong. The bid-to-cover ratio for the $20 billion offer was 2.48, the highest in the last eight auctions. But individual investor demand was a little soft. Noncompetitive bids totaled $91 million, down from $118 million in May and down from the average of $109 million in the twelve auctions preceding last month's.

Foreign demand was also relatively weak. Indirect competitive bids received 21.1% of the issue. Although this was a marked improvement from May's award portion of 16.3%, it was still lower than the twelve-month average of 26.0%.

Tomorrow's issue has a face value of $21 billion, the largest amount for a 5-Year Note since February of 2003.

10:30 AM EDT : Treasuries are once again in negative territory as the stock indices extend yesterday's gains despite several earnings disappointments reported since yesterday's close. A key contributor to this morning's trading action is another decline in oil futures. In recent trading, the price of a barrel of crude for September delivery (the new front-month contract) was down by $1.73 on the New York Mercantile Exchange at $126.69.

The futures price may fall further as the weekly report on oil inventories was stronger than anticipated. The Energy Information Administration said that supplies of crude fell last week by about 1.6 million barrels, a slightly smaller decline than the 1.9 million that analysts were expecting. One barrel equals forty-two gallons.

Moreover, inventories of gasoline rose by 2.8 million barrels, a much larger jump than the predicted 500,000. And distillates, which include diesel fuel, gained 2.4 million barrels last week, an eleventh consecutive expansion.

On a year-over-year basis, crude inventories were down by 14.6% but gasoline supplies were up by 6.0%, the best Y/Y margin in eleven weeks. Distillate inventories were 0.5% higher than a year earlier, the first positive Y/Y margin in that category since May of last year.

The decline in oil prices is lending support for stocks but the market is also facing some negative influences. After the bell yesterday, both Washington Mutual and Yahoo posted earnings that fell short of street expectations. This morning, Boeing released a disappointing report. Acting to offset some of the impact, though, were better than expected results from PepsiCo and McDonalds.

In industry news, the Mortgage Bankers Association of America said that its mortgage application index fell by 6.2% last week following three weeks of increases. The refinance index fell by 5.6% and registrations in that category represented 39.4% of all application activity, up slightly from 39.2% the week before. The purchase index fell by 6.7%. Applications for adjustable rate mortgages represented 8.5% of activity, down from the previous week's 9.1%.

Besides the allure of rising stocks, Treasuries are also feeling pressure from this week's new supply. This afternoon, the Treasury will be conducting its monthly auction of 2-Year Treasury Notes and the issue will have a record high face value of $31 billion. June's offering was a success. The bid-to-cover ratio on the $30 billion issue was 2.64, the highest in the last eight auctions.

Noncompetitive bids totaled around $696 million. While this was down from $767 million in May, it was still the second highest amount since August of last year. Noncompetitive bids represented 2.3% of the offer amount, down from May's 2.6% but the second highest amount since January.

Foreign demand was solid. Indirect competitive bids received 27.8% of the issue. This was up from the award portion of 21.8% in May and was above the 25.8% average for the twelve auctions preceding June's.

The deadline for competitive bids is 1:00 PM Eastern Time. The deadline for noncompetitive bids is noon.

Later this afternoon, the Federal Reserve will release its latest edition of the Beige Book. This is an anecdotal summary of economic conditions from the Fed districts, which the monetary policy committee uses asreference material in its meeting deliberations. The next meeting is scheduled for the August 5th.

Although the Beige Book reflects economic data that has already been released, observers will be watching for any emphasis or change in tone that might provide clues to upcoming policy actions . . . .