US rate markets slightly better this morning but not much; the early trade in stock indexes were pointing to a better open on UBS earnings. The Fed begins its FOMC meeting today concluding tomorrow with the short policy statement at 12:30 then Bernanke's awaited press conference at 2:15.

At 9:00 the Case/Shiller Feb home price index; on the 20 city measurement prices fell 3.3% yr/yr and on the 10 city metro prices fell 2.6% yr/yr. No reaction to the data as usual, there isn't any improvement in the housing markets with prices continuing to fall and consumers seeing little compelling reason to buy or sell. Housing was the prime driver for the US economy since WW II until four years ago, now there seems to be little interest from Washington to directly address the issue.

At 9:30 the DJIA opened +16, the 10 yr note +4/32 and mortgage prices at 9:30 +.12 bp.  

At 10:00 April consumer confidence from the Conference Board, expected at 64.4 frm 63.4 in March, was better at 65.4 frm March revision up to 63.8 frm 63.4. The present situation measurement at 39.6 frm 37.5 the highest since Nov 2008; 12 month expectations 82.6 frm 81.3 and the 1 yr inflation outlook index to 6.3 frm 6.7. Overall a better consumer outlook boosted equity indexes a little but the bond market had little initial reaction.

The only significant focus point now is on tomorrow's FOMC statement and what Bernanke will say at his press conference in answering what we hope will be the tough questions. The general conclusion now is that the Fed will complete its QE 2 $600B treasury purchases by the end of June. What comes next is what markets are seeking; most bond market participants and stock market enthusiasts are expecting Bernanke will keep interest rates low for at least the rest of the year and possibly longer. Bernanke and some other Fed officials have repeatedly defined the economy as in "modest recovery" and still fragile. As long as the Fed (Bernanke) see it that way the Fed will do whatever is necessary to keep rates low. As long as that outlook holds stock markets will continue to improve, low rates don't have much positive impact on consumers (maybe lower car loans), mortgage rates are low but that isn't motivating anyone. All about driving the dollar lower and pushing investments into equity markets.

Thursday the first look at Q1 GDP is expected at 1.5% to 2.3% growth; a lot weaker than was thought just six weeks ago. Increasing numbers of analysts are currently lowering growth expectations for Q2. The Fed isn't about to yank its support with the economic outlook not as rosy as most were expecting a short time ago. Two weeks ago markets were all a buzz fearing inflation as commodity prices increase, today focus has changed to how much more help the Fed will provide. Unlikely we will have another QE 3 but the Fed has other ways to pump money into the bond markets; it may decide to reinvest the interest and principal payments from its bond holdings in treasuries.

The bond market isn't expecting US rates will increase when the Fed ends QE 2 at the end of June. Since last Nov the Fed has purchased about $550B of treasuries while Treasury has issued $825B of notes and bonds, when the Fed ends its QE as is generally expected traders apparently believe markets will step up and fill the short-fall.

Treasury auction $35B of 2 yr notes at 1:00 this afternoon, expectations are for good bidding.

Technically the bond and mortgage markets remain bullish; that said we will continue to stand down from buying treasuries at least until we hear from Bernanke tomorrow.

The bond and mortgage markets continue to swing back and forth within a narrow range, yesterday the 10 yr note rate increased 4 basis points, this morning at 8:45 its yield down 4 bp. Mortgage prices fell yesterday 7/32 (.22 bp), this morning the price up 10/32 (.31 bp) at 8:45.

At 8:30 March consumer price index increased 0.5% in line with estimates, the core (ex food and energy) up 0.1% slightly less than 0.2% expected. Yr/yr overall CPI +2.7%, the core yr/yr +1.2%. Inflation concerns still the great debate with the Fed saying don't worry be happy while markets are worrying and are not happy. Who wins? The Fed isn't concerned that inflation in commodity prices will pass through to consumer prices, markets don't like fading the Fed on such a key issue but evidence is increasing that businesses are beginning to pass price increases down the chain. Not yet a major issue but one that bears watching. Bernanke's key word "transitory" describing inflation of commodity prices is keeping rates from moving higher but equally keeping rates from declining.

There is so much focus on inflation with global inflation increasing in Europe, China, India, Brazil, Russia and emerging markets that markets completely ignored the NY Empire State manufacturing data also out at 8:30 this morning. Normally the NY report gets attention even though it is a a small regional series, this morning it was as if it didn't exist. The overall index was expected to have declined to 15.0 frm 17.5 in March, as reported it jumped to 21.7. The sub-components also stronger; new orders index 22.34 frm 5.81, prices pd 57.69 frm 53.25 and employment at 23.08 frm 9.09. On another day those improvements would have pressured rates and improved stock indexes; today there was no interest in it.

While we hold our outlook that interest rates will slowly rise by the end of the yr, the near term is looking a little better; that said as long as the 10 yr continues to be comfortable in its near term narrow 10 bp range (3.40% to 3.50%) showing no tipping of the balance; mortgage rates also stuck in their ranges and will remain there until the 10 yr breaks in either direction.

Holding rates steady is the increasing realization that Q1 economic growth will be far less than what markets were believing just two weeks ago. More economists and some Fed officials are cutting Q1 GDP estimates to 2.0% growth from 3.55 to 4.0% that had been prevalent. Looks more and more like the unfettered optimism that was the consensus just a week ago has now been rattled especially when we have Fed district Presidents out there down-playing economic growth; a key reason that inflation concerns may be waning. The Fed's Plosser (Philly Fed) out this morning saying he isn't worried about inflation for at least another year; likely he sees economic weakness coming-----we agree but with rates increasing globally the US won't be able to easily fund the deficits at low rates.

At 9:15 March industrial production was expected up 0.5%, it increased 0.8% and factory utilization increased to 77.4% (the highest since August 2008) frm 76.9% in Feb. Both stronger than thought but there was no reaction to the data in the bond and mortgage markets. The stock indexes however have improved; early on the indexes were lower, at 9:20 the DJIA up 10 points and the S&P about unchanged (+1.5 points).

At 9:30 the DJIA opened +26, the 10 yr +19/32 at 3.43% -6 bp and mortgage prices +14/32 (.44 bp).

The final data point today; at 9:55 the U. of Michigan consumer sentiment index, expected at 66.0 frm 67.5, was 69.6, the current conditions index 82.7 frm 82.5, 12 month out expectations 75 frm 60; the 12 month inflation index was unchanged at 4.6. The rate markets got a minor boost on the data, so too the stock market-----a little for everyone in the data.

A couple of Fed speakers today; at 10:00 Alt Fed's Evans, at 1:30 KC Fed Pres Hoenig, Hoenig is the Fed's maverick wanting no QE and the Fed to begin thinking about tightening.

Listening and watching analysts, economists and politicians the take away is at the end of the day uncertainty is how most end their various forecasts. Not unusual to couch forecasts but recently the couching has taken on a higher level. Economic growth but at what pace? China, India, Russia, Germany, and emerging markets expanding at rapid rates; the US dragging along with more now revising growth lower than what had been though a couple of weeks ago. The bond and mortgage markets holding steady with little changes in interest rates over the past three weeks; we will continue our conservative approach to trading as long as our favorite 10 yr note sticks in its 10 bp range---no long positions, no shorting either----sometimes its better to just watch.

Treasuries rallying this morning on lower equity market trade and another slight run to safety on news that Japan has elevated the condition level on its nuke sites from a 5 to a 7, the same level as Chernobyl in 1986. Officials however are saying the level of radiation leaks is much lower than Chernobyl, still an increase to the highest level for nuke accidents. Also supporting rate markets; in the UK inflation levels slipped a little as is also the case on recent data from Mexico. In Germany investor confidence slid on ECB rate increase last week; German inflation unexpectedly accelerated to 2.3% last month after oil prices surged to more than $110 a barrel. (crude has declined $7.00 in the last 24 hours)

More not so good news for the economic outlook this morning. The National Federation of Independent Business index fell. "It looks like everyone became more pessimistic in March, consumers (The university of Michigan Confidence Index took a dive, tenth largest monthly decline in survey history) and business owners.  The Index of Small Business Optimism gave up 2.6 points in March, falling to 91.9, definitely a recession-level reading if history is any guide.".... "The bad news for the Fed (although not for the business owners who need to improve their bottom lines after the recession laid waste to their profits) is that price pressures continue to mount.  The decline in the Index was driven by weaker expectations for real sales gains and business conditions and a marked deterioration in profit trends.  Job creation plans weakened but remained in positive territory and plans to make capital outlays posted another gain (although reports of actual outlays over the past 6 months were unchanged).  Basically, the Index and its components are at recession levels from an historical perspective."

The Feb international trade deficit was about in line; -$45.76B. March import prices increased 2.7%, higher than 2.2% expected; export prices +1.5% higher than +0.8% expected. Food prices up 4.2% the largest increase since July 1994; yr/yr import prices up 9.7%. Yr/yr on export price +9.7%.

The DJIA opened -88, at 9:30 the 10 yr +19/32 at 3.52% -6 bp and mortgages +12/32 (.27 bp). Equity markets were not happy over the Alcoa earnings reported at 4:00 yesterday, the beginning of earnings season. Cisco also not helping equities with news of the company about to cut jobs.

The reactions to weaker earnings, a decline in small business confidence, Japan increasing the nuke emergency level from 5 to the highest 7 level, a sizeable decline in oil prices in the last 24 hours (about $7.00), and lower inflation stats from the UK have momentarily shaken markets. Not a big deal in the larger perspective but enough to pressure stocks for the moment and push interest rates slightly lower this morning.

At 1:00 Treasury will auction $32B of 3 yr notes. At 2:00 this afternoon Treasury will report the March balance, expected a deficit of $189B.

A nice start to the day but we are not swayed, the bond and mortgage markets if we look at it from the technicals are both near term oversold as we noted yesterday; the equity markets equally overbought. Both markets overdue for consolidation. The larger picture remains optimistic fore economic recovery, inflation concerns haven't evaporated as most countries are on a path of rate hikes. Then the much wider perspective; the US budget deficit that will play a huge role in the markets starting again tomorrow after Obama's speech. None of the driving issues justify optimism in the bond markets.

Treasuries and mortgages started a little weaker this morning; at 8:00 the 10 yr -5/32 and mortgages -2/32 (.06 bp). By 9:00 the 10 moved back to unchanged and mortgages +1/32 (.03 bp) frm yesterday's close. US stock indexes in pre-market trading were unchanged at 9:00. At 9:30 the DJIA opened -9, 10 yr note +1/32 3.55% unch, mortgage prices

+2/32 on 30s, +3/32 on 15s.

Weekly jobless claims at 8:30 were down 10K to 382K after another slight upward revision last week from 388K to 392K, the second week in a row claims have been revised a little higher from original reports. Continuing claims edged lower, to 3.72 mil from 3.73 mil last week.

A lot of media focus on the budget talks in Washington and to keep everyone on edge hyping the possibility of a government shutdown that is very unlikely. The Pres and Congressional leaders are close to an agreement to avoid even a few days of closings. This budget debate only deals with the budget through the end of this fiscal year (Sept); it is a prelim to the big debate (fight) over the 2012 budget. Politicians talk the talk about getting the budget deficit under control but for many years have not had the guts to walk the walk. Even some economists are out there saying the budget isn't a priority, zombies walking in a death gaze.

March chain store sales were better than expected. Not much, but better overall. Markets expected it and the various reports have done little to motivate investors.

Later this morning Treasury will announce the details for next week's auctions; 3 yr and 10 yr notes and 30 yr bond should total $66B down from $72B on last months same auctions.

The European Central Bank did what was widely expected and telegraphed by Jean Claude Trichet the head man at the ECB; it increased its base rate to 1.25% from 1.00%, the first rate increase in three years. Trichet said the increase was not the beginning of a series of increases, but most economists believe it is and that the rate will be at 1.75% by the end of the year. German economic growth and increasing signs of inflation in Europe is setting up more rate hikes justifying that rationale. Today’s ECB rate increase is the first since July 2008 and also the first time in 40 years that Europe’s benchmark has risen before the U.S. equivalent. Our Fed is reluctant to move rates on the belief that inflation isn't a problem and that the economy is still weaker than what the Fed wants to see.

The Bank of England also met today but left its base rate unchanged their policy makers judged the need to aid the recovery took precedence over the fastest inflation in more than two years. England's rate is 0.5% and has been at that level for 26 months. UK service sector saw improvement last month as announced Tuesday but manufacturing stalled in Feb. The UK struggling with inflation increase while consumer spending is being pressured by higher prices. The British Chamber of Commerce this week said first- quarter growth was probably between 0.6% and 0.7%. It said this is weaker than expected and adds to the argument that the Bank of England should delay raising its key interest rate.

Yesterday the 10 yr note broke its near term minor support at 3.50% to close at 3.55%. The 10 is now trading above its 20 and 40 day MAs on the yield chart. Mortgage markets also seeing breaks on its charts, slightly below the 20 and 40 day MAs on the price charts.