NEW YORK (CNNMoney.com) -- Stock futures turned sharply higher Tuesday after a key inflation report came in lower than expected and some items excluding food and energy actually saw a drop in price.

At 8:35 a.m. ET, S&P and Nasdaq futures were soundly higher.

The Producer Price Index, the government's reading of inflation at the wholesale level, rose 0.1 percent in July. Economists had forecast a gain of 0.4 percent, according to Briefing.com.

But the real surprise came when the core number, which excludes food and energy costs, declined by 0.3 percent. Economists were looking for a gain of 0.2 percent.

The report came a day before the Consumer Price Index, the measure of inflation at the retail level.

Inflation reports have gotten particular attention from the market after the Federal Reserve left interest rates unchanged for the first time in more than two years at its meeting last week, but said economic readings would determine if it would resume rate hikes at future meetings.

The Fed also is on alert for a slowing in economy, and Tuesday morning saw earnings reports from Wal-Mart Stores (Charts), the world's No. 1 retailer, and Home Depot, the nation's No. 2 retailer.

Wal-Mart reported operating earnings of 72 cents a share excluding items, meeting First Call's forecast, and gave fiscal third quarter earnings guidance of 59 to 63 cents a share, which is at or below the current analysts' consensus of 63 cents. It reiterated its earlier full-year EPS guidance.

Home Depot (Charts) reported earnings excluding items of 93 cents a share, a penny better than the forecasts of analysts surveyed by earnings tracker First Call and up 13 percent from a year earlier. But the company said its earnings and sales gains for the year will be at the low end of guidance it gave in January.

Shares of Wal-Mart and Home Depot were both down less than 1 percent in Frankfurt trading early Tuesday. The two are the only retailers in the Dow Jones industrial average.

Oil was lower as the Israel-Hezbollah cease-fire entered its second day. U.S. light crude eased 20 cents to $73.33 a barrel in electronic trading, while Brent crude traded in London dropped 30 cents to $74.

Treasury prices rallied, with the 10-year note yield falling to 4.95 percent from 4.99 percent late Monday. The dollar was lower against the yet and little changed against the euro.

Stocks in Asia closed little changed Tuesday, while stocks in Europe were lower in early trading.

In other corporate news, Dell (Charts) recalled 4.1 million notebook computer batteries with cells made by Sony (Charts), the largest recall in Dell's history, due to the risk of fire from the batteries. Shares of Dell were down 1.4 percent in pre-market trading Tuesday, while Sony closed down 0.4 percent in Tokyo trading.

More on U.S. markets ahead of the open.