In late trading, the 10-Year Treasury Note was up by 3/32, lowering its yield to 3.76%; the Dow was up by 89.64 points to 11,502.51; and the Nasdaq was up by 20.49 points to 2,382.46.

The bullish economic news was that the level of durable goods orders rose much more in July than analysts had forecast. A couple of key sub-categories also showed surprising strength (ex-defense orders and ex-defense capital goods minus aircraft).

But in the meantime oil prices continued their climb. The Energy Information Administration reported today that inventories of crude oil declined last week by about 200,000 barrels (one barrel equals forty-two gallons). The move was not too surprising given the unusually sharp jump of 9.4 million barrels in the preceding week. On a year-over-year basis, supplies were down last week by 6.1% but this was the best Y/Y margin since early May.

Inventories of gasoline fell last week by 1.2 million barrels. This was a fifth consecutive decline but the smallest of them. Supplies were 1.1% lower than they were a year earlier, a slight improvement over the preceding week's Y/Y margin of -1.7%.

Inventories of distillates, which include diesel fuel, edged up by about 100,000 barrels. They were still 0.8% below year-ago levels.

Though the main influence on oil prices today was defensive positioning ahead of possible supply disruptions due to Hurricane Gustav, the decline in crude and gasoline supplies added to the upward price pressure. By the end of commodities trading on the New York Mercantile Exchange, the price of a barrel of light, sweet crude oil for October delivery was up by $1.88 to $118.15. This was a third consecutive daily advance for a total of $3.56.

Nevertheless, stocks advanced for a second day. The Dow gained 0.79% today; the S&P 500, 0.80%; and the Nasdaq, 0.87%.

In the bond market, prices again exhibited a negative bias for much of the day. Yet, like yesterday, the longer dated securities edged higher late in the day while a weak 2-Year Note auction weighed against the short end.

Bids for today's issue exceeded the $32 billion offer amount by 2.18 to 1, the lowest bid-to-cover ratio in the last six 2-year offerings. The ratio was 2.42 in July's auction and the average for the twelve auctions preceding today's was 2.59.

Noncompetitive bids, a gauge of individual investor demand, were decent but not spectacular. They totaled about $752 million. Though this was above the twelve-auction average of $647 million, it was well below last month's $823 million.

Foreign demand was also relatively firm but a step down from last month. Indirect competitive bids, which include those from foreign central banks, garnered 28.8% of the issue. The twelve-auction average was 26.5% but last month's award portion was 35.8%.

The price gain for the benchmark 10-Year Treasury Note was small and the yield only slipped by 1 basis point (yield moves inversely to price). But today's closing yield was the lowest since April 30.

Tomorrow, the employment situation gets another once-over with the release of the jobless claims report. In last Thursday's report, the Labor Department said the seasonally adjusted level of initial claims for state unemployment benefits fell the week before by 13,000 to 432,000. The previous week's originally reported level of 450,000 was revised down to 445,000 and in the week before that, the previously reported 460,000 was trimmed to 457,000.

In the last two report weeks, the claims level has fallen by 25,000 but this followed four weeks of increases totaling 109,000. In addition, readings above 400,000 are perceived as indications that layoffs are outpacing hiring.

The four-week moving average, which smoothes out some short-term volatility, rose by 7,250 to 445,750, the highest reading since December of 2001. For the first thirty-three weeks of the year, the average weekly initial claims figure has been 373,879. For the same period last year, the average was 315,394.

The report said that the level of continuing claims for the week ending August 9 (continuing claims must be at least a week old) fell by 17,000 to 3.362 million. More significantly, the previously reported level of 3.417 million for the week ending August 2 was revised down by 38,000 to 3.379 million. Nevertheless, the four-week average rose by 66,250 to 3,330,250, the highest reading since November of 2003.

For the first thirty-two weeks of the year, the average continuing claims reading has been 2,995,063. For the same period last year, it was 2,517,813.

Little change is anticipated for last week's initial claims figure.

But the main economic news will be the first revision to last month's initial estimate of second quarter gross domestic product (GDP). GDP is the market value of all final goods and services produced by labor or property in the country in a year?s time. Quarterly data is adjusted and annualized and changes from quarter to quarter indicate the strength and direction of the economy.

In last month's advance report, the Commerce Department said GDP grew by 1.9% in the April through June period, a weaker increase than the 2.0% or more that analysts were predicting, but a marked improvement from the first quarter's gain of 0.9%.

Last month's report included revisions going back to 2005 because of the annual recalibration of seasonal adjustment factors. The revisions produced an average reduction to quarterly growth rates of 0.2% over that time period. A previously reported increase of 0.6% in the fourth quarter of last year was revised to a decline of 0.2%, the first contraction since the third quarter of 2001.

The major contributor to GDP growth in the second quarter was the improvement in the balance of trade (net exports of goods and services). It represented a 2.42% addition to the GDP calculation, the largest in the category since the third quarter of 1980. Residential investment remained a major weak spot.

The inflation news contained in the advance GDP report was tame. The price index rose by 1.1%, the smallest increase since the second quarter of 1998. The index for personal consumption expenditures (consumer spending) excluding the volatile categories of food and energy saw an increase of 2.1%. While this is still somewhat elevated, it was the lowest in three quarters.

The report on international trade for June showed a much smaller deficit than analysts had predicted. Because of this, the preliminary GDP report is expected to show a stronger jump in growth of between 2.5% and 3.0%. A high-end reading would be extremely bullish and likely boost stocks and depress bonds.

Bonds will be facing more supply pressure in any event since the Treasury will be conducting its monthly auction of 5-Year Notes tomorrow afternoon. Last month's issue drew decent demand. The bid-to-cover ratio was 2.46. Though this was down slightly from June's ratio of 2.48, observers had feared that the large offer amount -- a five-year high of $21 billion -- would dilute demand even more. In fact, July's ratio was higher than the 2.28 average of the twelve preceding auctions.

Noncompetitive bids totaled about $100 million. This was up from June's $91 million and was in line with the twelve month average of $101 million.

Foreign demand was firm. Indirect competitive bids received 32.9% of the issue. This was the largest award portion in the last four months and was higher than the twelve-auction average of 25.0%.

10:30 AM EDT : Treasuries are down this morning on strong economic data and positioning for new supply. The stock market is getting support from the economic news but a jump in oil prices is currently presenting a headwind.

The major economic release of the day was more bullish than anticipated. The Commerce Department reported that the seasonally adjusted level of new orders for durable goods items rose last month by 1.3%. This was a stronger reading than the 0.1% increase analysts were predicting. In addition, June's previously reported increase of 0.8% was also revised to a 1.3% rise.

Durable goods are defined as items meant to last three years or more. They are usually labor-intensive to produce, expensive, and therefore often financed. Because of this, the trend in orders provides some insight regarding upcoming production activity and the effect interest rates may be having on the process.

An especially volatile category is transportation and orders there rose by 3.1%, the largest increase in five months. Much of the lift was provided by a 28.0% jump in orders for commercial aircraft. Excluding the transportation category, orders gained only 0.7% in July following a 2.4% ex-transportation increase in June.

Orders outside the defense sector are also considered particularly significant since defense orders are not governed by standard market forces. Orders in the defense sector fell by 19.7% in July and ex-defense orders rose by 2.8%. Even further excluding the commercial aircraft component, orders were still up by a respectable 1.5%.

Another closely watched category is ex-defense capital goods minus aircraft since orders there are seen as a gauge of core business demand. The order level rose by 3.1% in July following a 1.3% rise in June.

In industry news, the Mortgage Bankers Association of America reported that its index of mortgage application activity edged up by 0.5% last week. Despite the gain, the reading was still the third lowest in over seven-and-a-half years.

The purchase index rose by 0.6% and the refinance index rose by 0.3%. Refinances accounted for 35.2% of application activity, up from 34.8% the week before. Applications for adjustable rate mortgages represented 7.9% of all activity, down from 8.0% in the preceding week.

The report said that average fixed mortgage rates declined slightly last week while the average 1-year adjustable rate increased.

Oil futures are up this morning as Hurricane Gustav threatens production facilities in the Gulf of Mexico. In recent trading, the price of a barrel of crude for October delivery was up by $2.03 to $118.30. High energy prices act as a brake on the economy since they weaken business and consumer spending in other market sectors.

This afternoon, the Treasury will be auctioning its monthly issue of 2-Year Notes. Since new issues have greater liquidity, traders avoid buying the soon-to-be off-the-run issue. Traders who will be bidding at the auction avoid buying the old issue since they want to keep yield levels high (bids are for yield). And many traders take to the sidelines until they learn how well the new issue has been received.

July's issue drew mixed demand but the sale was considered successful. The bid-to-cover ratio was 2.42, down from June's 2.64 and below the average of 2.60 for the twelve auctions preceding last month'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, noncompetitive bids represented 2.7% of the issue, the largest percentage since last November.

Foreign demand was also strong. Indirect competitive bids received 35.8% of the issue, the highest award portion since April of last year.

Traders are particularly concerned about today's auction because of its size. This month's 2-year issue will have a record high face value of $32 billion. In addition, the monthly auction of 5-Year Notes will be held tomorrow and it will have a face value of $22 billion, the largest amount since February of 2003 . . . .

LionMTS