A reversal of trends was evident midday Monday as the traditional sluggish August activity arrived after some unexpectedly frenzied action last week.

In recent trading, stocks were higher as crude prices slipped from last week's record-setting pace, while Treasuries slipped on a much better-than-expected report on New York manufacturing activity and despite evidence of resurgent foreign demand for U.S. bonds.

The 10-year Treasury bond was recently down 4/32 in price, while its yield rose to 4.26%.

Rising bond yields contributed to early selling pressure in stocks, but the major averages turned positive as crude oil prices fell back after hitting new highs every session last week. Crude oil for September delivery was recently down 16 cents to $66.70 a barrel.

The

Dow Jones Industrial Average

was recently up 40.04 points, or 0.4%, at 10,640.35. The

S&P 500

was up 4.0 points, or 0.3%, at 1234.39. The

Nasdaq Composite

was up 13.03 points, or 0.6%, at 2169.93.

Major averages were getting a lift from big-cap names such as

Apple Computer

(AAPL) - Get Report

,

Agilent Technologies

(A) - Get Report

and

Time Warner

(TWX)

. Advancing stocks were leading declining ones by roughly 3 to 2 in both Big Board and Nasdaq trading, but trading volume was modest as of 1:45 p.m. EDT.

Pressure on the Margins

The New York Empire State index was actually more bearish for stocks than for bonds because higher input costs may start eating into corporate profit margins.

The New York Federal Reserve said its Empire State manufacturing index stood at 23.0 in August, down from 23.9 in July but well above economists' expectations for the index to dip to 17.0. Almost every component of the index rose, including new orders, shipments, number of employees and future expectations.

The report did contain some inflation pressures as businesses reported paying higher prices for the goods they use to manufacture their products. The survey's prices paid index rose to 29.0 in August from 21.6 the previous month.

But the good news for inflation was that manufacturers didn't pass this on. The prices received index dipped to negative 1.0 from a positive reading of 0.98 in July. And businesses expect that trend to worsen in the months to come.

"Though there were more worries that costs would increase

in August, firms still don't have a lot of belief that they can raise their own prices," says Joel Naroff, president of Naroff Economic Advisers.

That may spell bad news for profit margins. "The lack of pricing power, coupled with rising employment, hours worked and wages point to a slowing in earnings and equity investors will be watching that carefully," Naroff says.

Profit-taking was the name of the game Monday in fixed-income trading. Last week, the 10-year Treasury bond rallied in price while its yield dropped 15 basis points to 4.24%, as economic data revealed little inflationary pressures and the

Federal Reserve

didn't ring the alarm bells on inflation, even after a strong July employment report.

After dipping throughout July as the market digested a stronger-than-expected economic outlook -- bond prices have now stabilized, according to Wall Street firms CIBC, Goldman Sachs and Merrill Lynch.

The monetary policy outlook, most economists agree, remains that the Fed will continue lifting its key fed funds rate at a "measured pace." While that continues to push short-term interest rates higher, longer-term rates -- which reflect expectations about inflation -- still appear resistant to a convincing move higher.

Last week's gains in bond prices came as crude oil surged to all-time highs and the University of Michigan's survey showed consumers again getting weary of the impact of high gasoline prices on their wallet, giving Goldman Sachs chief economist Bill Dudley a sense of

deja vu

.

"Stronger economy leads to higher oil prices, which crimps consumer spending, leading to soft patch and a fixed-income market rally," he wrote, referring to the slowdown in economy activity seen in the spring due to surging energy prices then.

"Right now we seem to be transitioning from the recognition of stronger growth to worrying about the effects of higher oil prices on consumption," Dudley added.

And while economists wait to see what impact the latest surge in crude oil prices will have on consumers, the yield of the 10-year bond will likely remain stuck between 4.10% and 4.60% for "quite some time," says CIBC interest-rate strategist Sid Mokhtari.

On Monday, the bond market largely ignored positive news that foreign central banks increased their purchases of U.S. Treasuries in June, easing concerns that foreign appetite would wane. Overall, the Treasury International Capital (TIC) report for June showed that net foreign purchases of U.S. assets rose to $71.2 billion, up sharply from $55.8 billion in May.

The report, which showed that the U.S. current account deficit remains financed for now, boosted the dollar, which was recently up 0.5% against the euro and up fractionally against the yen.

In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;

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