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Mortgage rates retreated to previous levels on Tuesday after staging a one-day surge on Monday. A report reassuring traders of U.S. Treasury securities that inflation is indeed under control allowed buyers to tiptoe back into the bond markets. Fear of increasing inflation, which robs fixed-rate assets of their value, kept pressure on Treasuries yesterday, as did falling oil prices. But today's reverse in sentiment sent bond prices back up and their yields, which move in the opposite direction of prices, down to Friday's levels. This allowed mortgage lenders who base their rates on Treasury yields to edge rates back down.

The Producer Price Index (PPI), which measures inflation at the wholesale level, rose by a less-than-expected 0.6 percent in August. Analysts were forecasting a 0.7-percent increase in PPI and a 0.1-percent rise in the core rate, which excludes volatile food and energy prices. The core - the number that most economists regard as a better indication of widespread inflationary pressures - was unchanged in August after rising 0.4 percent in July.

In a separate report, the U.S. trade deficit narrowed in July, easing to $57.9 billion from a revised $59.5 billion in June. Analysts expected the trade gap to expand to $59.8 billion. Although the news was regarded as a positive, it had little influence on the financial markets. Oil prices edged down for the better part of the day, but rose 9 cents to $63.20 a barrel before close. This had no noticeable effect on the markets, either.

Wall Street Stung by Weak Corporate News

A slew of disappointing corporate reports kept the three major indexes in the hole for most of the session, with only the Nasdaq composite momentarily peeking in to positive territory about an hour before close. Best Buy, the electronics giant, reported weaker-than-expected earnings that cost it 11 percent and cast a pall on the retail sector. Knight-Ridder, the newspaper publisher, said its third-quarter earnings would miss, and lost 5 percent on the news, while Majesco Entertainment plunged 50 percent on a worse-than-expected quarterly loss.

In addition, it looks like Northwest Airlines could be joining the ranks of air carriers filing for Chapter 11. Its stock tumbled 58 percent on word that it could file tomorrow. Delta Airlines, which made a similar announcement yesterday, saw its stock give up another 8 percent today after diving 23 percent yesterday.

The Dow Jones Industrials gave back Monday's gains plus a couple of points. Only five components ended positive and gains were minimal. Pressure on retailers showed itself as Home Depot and Wal-Mart each shed 1.8 percent, and McDonald's led all losers with a 2.2 percent decline. Also posting substantial losses were Procter & Gamble, down 1.8 percent, and Merck, which fell 1.7 percent. There were another 10 components that suffered 1-percent-plus losses - most of them weighty.

Although Nokia trades on the NYSE, its increased third-quarter sales and earnings forecasts had a positive influence on the Nasdaq. Although it lost less than the Dow and S&P, the Nasdaq closed negative nevertheless. Leading the Nasdaq was JDS Uniphase with a 1.8-percent gain. It was follow by Oracle and Yahoo!, which each added 1 percent. Of the five bellwethers to close negative, Cisco Systems and Ericsson posted identical losses - down 1.24 percent. Other declines were modest.

At closing: The Dow 30 Industrial Index fell 85.50 points -0.80 percent) to 10,597.44; the Nasdaq Composite index lost 11.08 points (-0.51 percent) to 2,171.75, and the benchmark Standard & Poor's 500 Index dropped 9.36 points (-0.75 percent) to 1,231.20. The 30-year Treasury bond rose 16/32 with the yield slipping to 4.39 percent from 4.44 percent at Monday's close. The 10-year Treasury note was up 12/32 in price with the yield falling to 4.13 from 4.17 percent at Monday's close. The 5-year Treasury note added 2/32 in price with the yield falling to 3.92 percent from 3.97 percent at Monday's close. At 4 p.m. EDT, AVERAGE mortgage rates (zero discount points) based on rates collected nationwide were: The 30-year Conventional Fixed-Rate Mortgage was at 5.536 percent versus5.575 percent at Monday's close. The 15-year Conventional Fixed-Rate Mortgage was at 5.119 percent from 5.164percent at Monday's close. Coming Up: The two reports set for release on Wednesday carry clout. Retail Sales for August are expected to fall 1.3 percent. Excluding auto sales, however, sales are predicted to increase 0.7 percent. These numbers are vastly different from the 1.8 percent increase in sales registered in July, and the 0.3 percent uptick when autos were excluded. If numbers come in as expected for August, it would likely calm bond traders. Strong retail sales pump up the economy, and these predictions are far from strong.

In a separate report, Industrial Production for August is expected to climb 0.4 percent - a big increase over the 0.1 percent rise in July. Capacity Utilization, the percent of mines, utilities and factories in production, is expected to edge up to 79.9 percent from the previous 79.7 percent in July. Bigger increases in production could be interpreted as adding to economic strength, which could provoke selling in bonds. Because Treasury yields, which lenders base their rates on, edged back down to previous levels, this should allow mortgage lenders to hold rates at newly lowered levels.

Carolyn Siegel

carolyn@interest.com

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