Another better start this morning but by 10:00 mortgage prices have fallen back from earlier better levels; the 10 yr at 9:00 +19/32 at 2.75% -8 bp, mortgages up 10/32 (.31 bp). Europe's sovereign debt problems continue to dominate, the impact mostly seen in the currency markets with the dollar continuing to increase. Europe's bank stocks being hit hard as it is increasingly evident that the EU isn't yet ready to face the debt problems head on, letting each country move to the edge before acting. What is lacking is a wider solution to deal with the problems faced by countries in the EU that are close to defaulting. The dollar benefits sending stock indexes lower and safe haven moves into US treasuries. After Ireland Portugal and Spain are now the next two that need a bailout. The US stock market opened weaker, as the dollar increases equity markets fear weaker exports.


At 9:00 the Case/Shiller home price index was expected to show a slight increase in prices, the index fell 0.7% strongly suggesting the housing markets may be headed to a double dip. Q3 home prices fell 1.5% yr/yr and -2.0% from Q2. The report added to selling in stock indexes ahead of the open. It also limited the improvement seen earlier in MBS trading. The gauge fell 0.8% in September from the prior month after adjusting for seasonal variations, the biggest drop since April 2009, following an August decrease of 0.5%. Unadjusted prices fell 0.7% from the prior month. The 20 city index of property values climbed 0.6% from September 2009, the smallest gain since January, the last time prices declined year over year.


The DJIA opened -88 at 9:30; the housing data and Europe's problems setting the early tone. Mortgage prices held gains but were well off the best levels prior to the 9:00 C/S report.


At 9:45 the Nov Chicago purchasing mgrs index, expected at 59.8, jumped to 62.5 frm Oct's 60.6. All sub components were also better; new orders at 67.2 frm 65.0, prices pd at 70.7 frm 68.9 and employment at 56.3 from 54.6 (any index read over 50 is considered expansion, under 50 contraction). The report sent mortgage prices down, from +7/32 to +3/32; the 10 yr note also lost a few clicks and the stock market gained a few points frm down 90 to -70.


At 10:00 the Nov consumer confidence index from the Conference Board; the index was expected at 52.0 frm 50.2 in Oct; it hit at 54.1 and Oct was revised to 49.9; the expectations index also increased, to 74.2 frm 67.5. The confidence index is the best since last June. Not much initial reaction to the better consumer read but mortgage prices slipped once again.


Later this morning the NY Fed will do another QE buy of treasuries; it will not have any direct impact on rate markets however.


The mortgage market remains solidly bearish, the action so far this morning is not encouraging, MBSs opened strong but have been losing ground since. After the 9:45 Chicago purchasing mgrs report 30 yr MBSs fell back to just slightly better on the session. The near term support is coming from the safe haven moves into US treasuries grudgingly dragging prices up.
  Interest rate markets doing better this morning with markets moving into holiday mode. Thanksgiving week usually is quiet however these times are in themselves very unusual so we won't relax. There are no economic releases scheduled today; all the data this week hits on Tuesday and Wednesday, Thursday markets are closed of course and will close early on Friday ( US markets can't stand a four day weekend).


Today Treasury will begin its usual end of the month auctions; this afternoon at 1:00 $35B of 2 yr notes will go up fro bids, tomorrow its $35B of 5 yr notes and Wednesday $29B of 7 yr notes. With the recent increases in interest rates traders are looking for better demand than what we have seen in recent auctions; weak demand if it occurs will not be well received in the rate market trading.


Although it is a holiday week, there are a number of key data points to consider. Existing and new home sales, Q2 GDP, and durable goods orders headline the week.


This Week' Economic Calendar:


             1 :00 pm $35B 2 yr note auction


             8:30 am Q2 preliminary GDP (+2.4% frm +2.0% on the advance report last month)

             10:00 am Oct Existing home sales (-2.5% to 4.42 mil annualized)

             1:00 pm $35B 5 yr note auction

             2:00 pm FOMC meeting minutes from 11/3 meeting


             8:30 am Oct personal income and spending (income +0.4%, spending +0.5%)

                          Oct durable goods orders (-0.3%, ex transportation orders (+0.4%)

                          Weekly jobless claims (+2K to 442K; continuing claims 4.280K frm 4.295K)

            9:55 am U. of Michigan consumer sentiment index (69.4 frm 69.3)

           10:00 am Oct new home sales (+1.6% to 312K frm 307K annualized)

            1:00 pm $29B 7 yr note auction

      Thursday; THANKSGIVING


           1:00 early closes


Last week with rates running higher daily, the 10 yr note found a little support at 2.96% after running to it three times and unable to break out. Today the 10 yr note at 2.82% down 6 bp so far this morning. Mortgage prices also improving today. The outlook still remains negative for interest rates but as we have noted on more than a few occasions we are not expecting US interest rates to continue to climb much more. IN the long run, yes, rates are likely to escalate, however in the near term expect the bond and mortgage markets to consolidate at or near the present levels. Don't look for rates to decline back to the lows we had two months ago; we believe the lows in rates have already been achieved. This week being a shorten one expect markets to remain bearish but quiet. The FOMC minutes tomorrow will draw heavy attention, the meeting when the Fed officially announced the $600B QE 2 that has not been universally accepted even by current and former Fed officials.
  A little better look this morning in the bond and mortgage markets. The huge and swift selling over the past week or so has the markets technically oversold now based on our momentum oscillators. Should support the markets for a day or so. Even with a retracement though it will not likely change the near term bearishness that has infected the rate markets. No one wants US treasuries now and that will be the case until rates move high enough to attract interest again. The QE 2 move from the Fed has been globally criticized; China lowered the US debt rating, Brazil, Germany and other key European countries have made it clear they believe the Fed's printing of $600B to buy US treasuries will drive the dollar lower and potentially lay the foundation for a currency war. Every exporting nation wants a weaker currency to gain a competitive advantage; the US was roundly rejected again by China to increase their yuan.


U.S. stocks and Treasuries declined yesterday as a group including former Republican government officials, economists and hedge-fund manager Cliff Asness urged Federal Reserve Chairman Ben S. Bernanke to halt his expansion of monetary stimulus, saying it risks an inflation surge. Fed Bank of New York President William Dudley said in an interview with CNBC that the central bank’s bond purchases won’t cause an inflation problem.


The rate markets see the QE as inflationary and are cutting bond holdings in a mass selling run. Interest rates have increased 40 basis points on the bellwether 10 yr note in the last 10 sessions; mortgage rates up about 30 basis points. The Fed continues to speak of its desire to increase the rate of inflation to avoid potential deflation in the economy. Bernanke believes that a small increase in the rate of inflation will stimulate more consumer spending and eliminate a Japanese style long term deflationary economy. All one needs to know is that fixed income investors abhor any move up in the rate of inflation. In this instance with long term rates as low as they continue to be, an increase of just 1.0% in the inflation rate reduces the real rate of return by that amount, leaving investors with a real return of 1.9% and that is not good enough to continue funding the US deficits.


At 8:30 this morning Oct producer price index hit at +0.4%, half of what was widely expected; the ore rate (ex food and energy components) was expected at +0.1% but actually declined 0.6% with the yr/yr core rate of inflation at +1.6%. A positive for the the bond markets but didn't light any additional fires to the skimpy rally earlier.


At 9:15 this morning Oct industrial production was unchanged with markets expecting an increase of 0.3%. Oct factory usage was also unchanged with forecasts of 74.9% it hit at 74.8%, unchanged from Sept that was revised to 74.8% frm 74.7%. No increase in production or factory use; but manufacturing rose 0.5% after a 0.1% increase in September that was previously reported as a 0.2% drop. Total production was little changed by the biggest drop in utility use in six months that was probably caused by unseasonably mild temperatures last month. The headline looked soft but the guts were better with the increase in manufacturing.


The DJIA opened down 80 points at 9:30, the 10 yr note +24/32 at 2.87% -9 bp and mortgage prices +11/32 (.34 bp). Rate markets are momentarily oversold so a rebound is not unexpected. It would take a rather substantial rally now to reverse the bearish outlook. The Fed's easing move has unnerved traders and investors; it is unprecedented leaving markets confused. With interest rates at historic lows any uncertainty will rock markets hard as we have witnessed over the past week. Longer term; we believe the bull market in interest rates is over. Rates have already hit their lows and unlikely will fall back much unless the economy tumbles over, and that appears unlikely now.


At 10:00 the Nov NAHB home index was at 16 as expected, up 1 point from Oct which was revised lower by 1 point. the index is the highest since June but is still in depressed levels. The expectations for buyers over the next six months increased to 25, the highest since last May. No reaction to the report as usual.

  It is a massive dumping of US treasuries, selling has been exceptionally strong the past week and about the only hope now is that the momentum oscillators are reaching oversold levels. The bond market is seen now as the least desirable investment compared to equities and commodities. The Fed's continual comments that the inflation rate is too low have finally flipped investors and traders; along with the complete failure of QE 2 to push rates lower. Unless there is a huge negative economic decline the end has come for low rates; this morning at 8:30 Oct retail sales, expected up 0.7%, jumped 1.2%, ex auto sales +0.4% as expected. Stronger sales drove the stock indexes a little higher implying a better open ion stocks at 9:30. 


Also at 8:30 the NY Empire State manufacturing index hit; very weak at -11.4 frm +16.73 in Oct. Markets ignored the huge decline with the excuse that NY is not a big manufacturing state. Heard that many times before, but curious that when the regional report is better than expected there isn't any of that kind of reaction. The sub-components in the rep-ort were equally weak; employment index fell to 9.09 frm 21.67, new orders fell to -24.38 frm +12.90 and prices received at -2.60 frm +8.33. ( any index over zero is considered expansion, under zero contraction).  


At 10:00 Sept business inventories, expected up 0.9%, hit right on at +0.9%; final sales up 0.5%. The inventory to sales ration 1.27 months unchanged from Aug. The DJIA dropped a little on the report and rates markets saw a slight bounce.


Congress gets back to business today, if that is what we can call it; a lame duck session with 100 new members in the House isn't expected to accomplish much. The only issue that needs to be acted on is the extension of the Bush tax cuts set to run out at the end of the year. Likely there will be an extension for a short period until next year when the real work and political bickering gets started. Washington is not working! Yet so far there isn't much evidence that it is about to change. Voters tossed out Democrats, just as two years ago they tossed out Republicans, still politicians appear clueless as to what has to be done by both parties.


The recent increase in US interest rates is among other issues reflective of the world's disappointment that the Fed decided to print another $600B. Criticism is widespread and is one factor driving rates higher now. China has downgraded its credit rating for US debt; S. Korea ignored and refused US pressure fro a new trade deal, Europe and Asian countries are protesting the QE move. The underlying view of the US now is that our political system is unable to come to any meaningful consensus on most of the very critical problems we face. Last week the bi-partisan commission set up by Pres Obama to study and come up with ideas to begin witling away the US exploding deficit was summarily dismissed by both parties almost immediately as unworkable. The world is watching and what they see is Washington castrated and lead around by special interests while the US fiddles away.


This Week's Economic Calendar:


            8:30 am Oct retail sales +1.2%

                         NY Empire State manufacturing index -11.4

           10:00 am Sept business inventories


           8:30 am Oct PPI (+0.8%, ex food and energy +0.1%)

           9:15 am Oct industrial production (+0.3%)

                        Oct capacity utilization (74.9% frm 74.7%)

          10:00 am NAHB housing index (15.0 frm 16.0)


          7:00 am MBA weekly mortgage applications

          8:30 am Oct CPI (+0.3%, ex food and energy +0.1%)

                       Oct housing starts and permits (starts -1.7%, permits up 4.6%)


         8:30 am weekly jobless claims (+7K to 442K)

        10:00 am Oct leading economic indicators (+0.6%)

                      Nov Philadelphia Fed business index (+4.5 frm +1.0 in Oct)


At 9:30 this morning mortgage prices were down 20/32 (.62 bp) by 10:00 a little better, down 13/32 (.41 bp). The rate markets are oversold with the massive selling over the last week; expect some support in the near term but the trend is decidedly bearish and rates will likely move higher over the next few months unless there is a huge change in economic outlook or the Fed jawbones that inflation, while expected to increase as it wants, won't be allowed to head much higher. Unlikely though that the Fed has as much jaw power it usually has after what presently looks like a failed attempt to stimulate the economy. There are however some out there that are touting the success of QE 2 already with increases in inflation fears. Investors are paying eight times more than in April for options on interest-rate swaps that protect against rising yields relative to those that bet on them falling. Bonds that compensate for higher consumer prices also show heightened inflation expectations.


  Today is the day the world awaited (since 9/21); at 2:15 the FOMC statement will come and finally markets will know for sure what the Fed is about to do on the QE 2 easing move. Going in to it, there is widespread belief that the treasury buying will total $500B and accomplished over a six month period. The Fed is always concerned not to shock financial markets so it is unlikely that whatever their plan it won't rattle markets with something well off target.


The election results are about what was expected; the House to Republicans, the Senate stays with the Democrats. No noticeable market reaction to the results as they were widely expected. Treasuries and mortgages opened better this morning; at 8:15 the Oct ADP non-farm private jobs report hit, expectations were for an increase of 23K jobs as reported ADP said private jobs increased 43K. In Sept ADP reported private jobs were down 39K, today it was revised to -2K. Better than expected but still no real new hiring; there was no reaction to the report in either the stock or bond markets. 


At 9:30 the DJIA opened +10, the 10 yr note +12/32 at 2.55% -4 bp and mortgage prices much better; +12/32 (.37 bp) on 30s and +7/32 (.22 bp) on 15s.


At 10:00 Sept factory orders were expected up 1.7%; orders increased 2.1% and Aug orders were revised to unch frm -0.5% originally reported.


Also at 10:00 the Oct ISM services sector index, expected at 53.5 frm 53.2 in Sept, was better at 54.3. The new orders components increased to 56.7 frm 54.9, employment component at 50.9 frm 50.2 in Sept and price index at 68.3 frm 61.1.  There was no initial reaction to the data; although stronger with the FOMC statement later today markets are storing the data but not reacting yet.


Waiting now for the FOMC policy statement this afternoon. How the Fed will do the so-called easing, how much, when and comments about the economic outlook should be included in the normally short statement that concludes the meeting. It is uncertain how traders will take the easing move, how the dollar trade will occur, and what the market expectations will be on any direct benefits of an easing move. As noted previously, the Fed appears determined to increase the inflation rate by weakening the dollar with the QE. Fixed income investments in US treasuries at the current low levels may be a hard sell to investors if markets believe the Fed will be successful in bringing up the inflation rate back to their perceived target range of 2.0% to 2.5%. A quantative easing will bring interest rates down as long as economic data points are weak, however recent data has been fractionally better than estimates on some of the key data. The markets may not react much on the FOMC statement with Oct employment scheduled Friday. Present estimates after the ADP report this morning are being revised better than prior to the ADP, from estimates of 60K non-farm private job gains to 80K to 100K, still very weak but may bother traders with inflation concerns resting right under the surface. No rally in the bond market and mortgage market if inflation fears increase.


The MBA today released its Weekly Mortgage Applications Survey for the week ending October 29, 2010 at 7:00 am.  The Market Composite Index, a measure of mortgage loan application volume, decreased 5.0%.  The Refinance Index decreased 6.4% from the previous week. This is the third straight week the Refinance Index has decreased.  The seasonally adjusted Purchase Index increased 1.4% from one week earlier. The four week moving average for the seasonally adjusted Market Index is up 0.1%.  The four week moving average is down 2.7% for the seasonally adjusted Purchase Index, while this average is up 0.8% for the Refinance Index. The refinance share of mortgage activity decreased to 81.3% of total applications from 82.3% the previous week. The average contract interest rate for 30-year fixed-rate mortgages increased to 4.28% from 4.25%, with points increasing to 1.07 from 1.00 (including the origination fee) for 80% loans.  The average contract interest rate for 15-year fixed-rate mortgages decreased to 3.64% from 3.67%, with points increasing to 1.08 from 0.96 (including the origination fee) for 80% loans.


Treasury announced the details for next week's quarterly refunding; $32B of 3 yr notes on Monday, $24B of 10 yr notes on Tuesday, and $16B of 30 yr bonds on Wednesday.


Not looking for much movement now until 2:15 with the FOMC policy statement release