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Another strong report on manufacturing conditions on Monday raised concerns about inflation and spurred yet another sell-off in U.S. Treasury securities. Recent reports verifying that the economy is seeing solid growth have raised the specter of inflation and put pressure on Treasuries. Inflation is the sworn enemy of fixed-rate assets - eroding their value. Traders appear to be pricing in inflationary pressures and future Fed rate hikes that are likely to be implemented to fight inflation. As a result, Treasury prices are falling and their yields, which move in the opposite direction of prices, have hit three-month highs. Mortgage lenders who use yields as a guide to set rates have therefore been forced to edge rates up on most mortgage products.

The Institute of Supply Management (ISM) report on manufacturing conditions in July came in at 56.6, beating forecasts for a 54.5 reading, and topping June's 53.8. Any number above 50 indicates expansion in the sector. This was the highest ISM reading of 2005 and it marks the longest period of continuous growth - 26 months above 50 -- in 16 years. A negative for the markets is the soaring price of oil, which closed at another new high -- $61.57 a barrel. Issues at two BP refineries paired with the death of Saudi Arabia's King Fahd left the markets uneasy, although Saudi policy is expected to remain intact. In a separate report, New Construction in June came in below expectations, but it was not a factor. Construction spending rose 0.3 percent, which was far better than the downwardly revised negative 1.7 percent in June, but it was shy of forecasts for a 0.7 percent increase.

Stocks Split on Pressure from Oil, Tech Surge

The increase in oil prices weighed on the Dow Jones Industrials as investors fear rising prices could eat into corporate profits and seed inflation. Losers outpaced gainers in the Dow, with 13 components closing up and 17 finishing in negative territory. There were, however, only a few big moves on either side. Microsoft was the only Dow member to gain more than 1 percent, while Honeywell, Merck, United Technologies and Home Depot each shed more than 1 percent. Other movements were moderate to small.

Unlike the Dow Jones, which bobbed in and out of negative territory most of the session, the Nasdaq traded in positive territory all day. It got help from a couple of sources, one being eBay, which rose 4 percent after it was upgraded. Radio Shack (which trades on the NYSE) climbed 14 percent after announcing that it would sell Cingular wireless units, which impacted the tech-heavy Nasdaq. Like the Dow 30, the tech bellwethers closed mixed. Microsoft's 1.2 percent gain was countered by Qualcomm's 1.2 percent loss, and the others fell somewhere in between. The Nasdaq, however, climbed within five points of 2200 - a psychological plateau.

At closing:

The Dow 30 Industrial Index fell 17.76 points or 0.17 percent to10,623.15; the Nasdaq Composite index was up 10.55 points or 0.48 percent at 2,195.38, and the benchmark Standard & Poor's 500 Index gained 1.17 points or 0.09 percent to close at 1,235.35.

The 30-year Treasury bond was down 21/32 in price with the yield rising to 4.51 percent versus 4.47 percent at Friday's close.

The 10-year Treasury note was down 10/32 in price with the yield rising to 4.31 percent versus 4.28 percent at Friday's close.

The 5-year Treasury note was down 4/32 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 5.656 percent from 5.576 percent at Friday's close.

The 15-year Conventional Fixed-Rate Mortgage was at 5.25 percent from 5.153 percent at Friday's close.

Coming Up

Personal Income/Outlays for June will be released on Tuesday and it could impact the markets if the personal consumption expenditure (PCE) within the report shows any signs of inflation. This is one of the Fed's favored inflation indicators, so it is closely watched. Analysts are expecting income to increase 0.4 percent, which would be stronger than the 0.2 percent increase in May. Personal spending, however, is expected to climb 0.9 percent - a huge increase from the 0 percent in May. The other report due is Factory Orders for June, but this is much less influential. Orders are forecast to climb 1.1 percent, far less than the 2.9 percent increase in May.

Considering the substantial increase in mortgage rates over the weekend, and the level that they are at right now -- the 30-year fixed-rate is just below 5.625 percent and the 15-year fixed is right at 5.25 percent -- it is unlikely that they would climb to the next plateau within a day or two.

Carolyn Siegel

carolyn@interest.com

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