Treasuries and mortgages were unchanged in early activity this morning with US stock indexes weaker. At 9:30 the 10 yr traded +4/32 at 1.95% and mortgage prices +3/32 (.09 bp). The debt crisis in Europe is not getting better, its actually worsening after the EU summit fumbled again with nothing but way out plans. Moody’s said on Monday that last week’s euro crisis summit didn’t provide new measures which would lead to a resolution of Europe’s debt problems, and it would review European Union sovereign ratings in the first quarter of 2012. S&P said before the meeting that it may cut the credit rankings of euro members. Italy sold 5 yr notes at the highest rate in 14 years, more evidence the debt mess is nowhere close to any resolution. In the UK additional evidence Europe is moving back into recession; the unemployment rate increased to 8.3% frm 7.9% in the latest quarter. Unemployment among 16-24-year-olds climbed 54,000 to 1.03 million, or 22%, the highest since comparable records began in 1992.


Yesterday's FOMC meeting disappointed investors with the Fed not willing to add more easing. Stocks in Europe weaker and in the US opening soft at 9:30. In the FOMC statement  the Fed said that there is an “apparent slowing in global growth” and that “strains in global financial markets continue to pose significant downside risks to the economic outlook.” While admitting the obvious, the Fed also said the US recovery is moving slowly but in a positive direction.


Nov export prices were up 0.1% while import prices increased 0.7%; no reaction in the markets to the report. At 1:00 Treasury will finish this week's auctions with $13B of 30 yr bonds, it will likely be very well bid as was yesterday's strong 10 yr auction. The 10 yr trading now below 2.00%; can it be sustained. Since the beginning of Nov every move below 2.00% has been short-lived; after the blown EU summit last week there is a renewed run for safety into US treasuries. While history is important, this time may be different in that Europe has clearly demonstrated that there is no immediate way to deal with the possibility of defaults in Italy and Spain. While unlikely defaults will actually occur, investors are not going to accept that as a given.


The weekly MBA mortgage applications weaker on purchases but better on re-finances. The volume of purchase applications swung lower in the December 9 week, down 8.2% vs an 8.3% rise in the prior week. Swings in weekly data can be severe but the overall trend for purchase applications has been positive. The volume of applications for refinancing has also been positive, up 9.3% on top of the prior week's 15.3% gain. Low mortgage rates are behind the demand with the 30-year averaging 4.12%, down six basis points for the lowest rate of the year.


At 1:00 Treasury auction $13B of 30 yr bonds, look for another strong auction with good demand.


So far this morning not much movement in the bond and mortgage markets; the stock market opened weaker but also has seen little movement. Technically the bond market remains bullish, that the 10 yr is under 2.00% is nice but can it hold? In past moves below 2.00% buying dried up and the note moved quickly back above it. It depends on US equity markets and the turmoil in Europe. After last week's disappointment over the EU summit meeting that produced nothing there is another round of safe haven buying; based on history the 10 won't hold below 2.00% for long. Take advantage of the current rates.

Nov employment at 8:30 was generally in line with estimates. Today's news will feature the unemployment rte dropped to 8.6% frm 9.0%; non-farm jobs increased 120K while private non-farm jobs increased 140K, average hourly earnings +0.1%. The unemployment rate is the lowest since March 2009, but there is a hitch to the headline; the labor participation rate declined to 64.0% frm 64.2% implying that more potential workers have dropped out from looking for a job. The decrease in the jobless rate reflected a 278,000 gain in employment at the same time 315,000 Americans left the labor force. Revisions to Sept and Oct added 72K more jobs than originally reported. The U-6 underemployment rate declined  from 16.2% to 15.6%, it includes part- time workers who’d prefer a full-time position and people who want work but have given up looking.


That non-farm jobs increased 120K reflects many jobs are temporary hirings for the holidays, the reaction in the bond and mortgage markets wasn't much change from yesterday's closes although slightly lower as traders discount the decline in the unemployment rate and job growth was fractionally lower than general estimates. The stock indexes were trading better prior to 8:30 on the back of continued improvement in Europe's equity markets; there was little change in the indexes following the report.


In Europe there is some increased optimism that the debt crisis may be helped by the ECB funneling funds to the IMF then the IMF leverages the funds and provides funds to Italy and Spain taking them back from the abyss. Next Friday Europe's leaders will meet in a summit in Brussels, the meeting must end with something more than what the world has had to swallow for two years----a lot of talk but little action. Given the improvement in Europe's equity markets this week and the best week for Italy's and Spain's 2 yr note yields this week, optimism is increasing.


At 9:30 the DJIA opened 90 points better, the 10 yr note at 9:30 -9/32 at 2.12% a near term support level and mortgage prices off just 4/32 (.12 bp).


So far today the employment report has had little impact on the US financial markets. The bellwether 10 yr note has near term support at 2.12% that has been tested a few times and held, at 10:00 it traded at 2.11% after ending yesterday at 2.10% after moving to 2.14% intraday yesterday. Mortgages have been held captive in a 50 basis point price range for three weeks now while the 10 yr volatility swings its yield from 2.12% to 1.86% on every sentence out of the mouths of Europe's leaders.


We haven't changed our outlook that the US interest rate markets are unlikely to decline much from the present levels and have more potential to rise that decline. While Europe's mess will take years to resolve the markets now are believing that a plan will surface soon that will remove much of concern that Europe's banks would fail. Over the last couple of weeks the safety moves into US treasuries has ebbed substantially. We can argue that the US economy won't  improve much based on the housing market and the high level of unemployment, however trading in the equity markets implies investors are increasingly more optimistic about the future. Either way one sees it the reality is that no one is sure, that has lead to huge wings in the indexes and has contributed to keeping interest rates from falling further.