Early this morning the 10 yr note made a new low yield at 2.88% frm 2.97% at the end of yesterday on increasing concerns over Europe's debt problems headlined by Greece. The European Union’s failure to contain the Greek debt crisis is sending fresh shockwaves through currencies, money markets, equities and derivatives. The cost of protecting corporate bonds soared to the highest level since January, with credit-default swaps anticipating about a 78% chance that Greece won’t pay its debts. Equities declined around the world, while a measure of fear in fixed-income markets jumped the most since November. Market moves suggest heightened concern that authorities won’t be able to keep Greece’s debt troubles from spreading after Moody’s Investors Service said it may downgrade BNP Paribas SA and two other big French banks because of their investments in the southern European nation.

At 8:30 weekly jobless claims and May housing starts and permits pushed yields up as the data was better than expected; weekly claims were down 16K to 414K. forecasts were that claims would be 421K, continuing claims also fell (21K). May housing starts were about what was expected, up 3.5% with single family starts up 3.7%; April starts were revised from -10.6% to -8.8%. Building permits were thought to be down 0.5% but reported up 8.7% the highest permits since Dec 2010; multi family was the main reason for permits higher, multi-family permits jumped 23%. The two data points took the wind out of the bond market and safe haven buying that had set a new low yield on the 10 yr and had mortgage prices up 8/32 (.25 bp) frm yesterday's close.

At 8:30 the Q1 current acc't deficit was -$119.27B lower than -$130B expected. The current account measures the United States' international trade balance in goods, services, and unilateral transfers on a quarterly basis. The levels of exports, imports and the current account indicate trends in foreign trade.

By 9:15 the 10 yr note yield climbed back to 2.96% frm 2.88% prior to the 8:30 data, mortgage prices at 9:15 unchanged after being up .25 bp at 8:15. The DJIA futures traded had the index unchanged at 9:15 after being down 70 points at 8:15. Volatility remains high as we noted yesterday.

Keeping the running story going, at 9:30 the DJIA opened down 6 points, the 10 yr at 9:30 +7/32 at 2.95% -2 bp and mortgage prices very volatile this morning up 3/32 (.09 bp). Trade between 9:30 and 10:00 wasn't significant with the 10:00 Philadelphia Fed business index due. Always significant to traders, this time it is even more so after yesterday's NY Fed manufacturing report went negative indicating contraction.

At 10:00 continued volatility with the Philly Fed business index; the index went NEGATIVE indicating contraction. The index was expected at +8 it fell to -7.7 the second report in the last 24 hours that the economy is contracting. New orders in the June report were negative at -7.6 indicating orders declined, the employment component fell to 4.1 frm 22.1 in May while prices pd fell to 26.8 frm 48.3. May Philly Fed was 3.9. The initial reaction put a small bid back into bonds and mortgages but not as much as we might have thought. The DJIA at 10:06 +26, the 10 yr +9/32 at 2.94% and mortgage prices +3/32 (.09 bp).

 
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May non-farm jobs were up just 54K, non-farm private jobs +83K; the unemployment rate increased to 9.1% frm 9.0% in April. April and March non-farm jobs were revised down by an additional 39K. Manufacturing down 5K, government jobs -29K mostly at the state level. The U-6 jobless rate 15.8%; those underemployed and those that have stopped looking. Jobless duration 27 weeks or more 6.2 mil up frm 5.839 mil in April. Going into the report the estimates were +150K non-farm jobs, +175K private jobs, 8.9% unemployment rate; estimates were all over the place but those were the general consensus.

 

The bullish view is that the slowing in the economy is temporary; weather, high gas prices and climbing food prices are pulling the economy lower. There is however a hard core group of forecasters, mostly those whose business requires investments in equities, that will continue their bullish outlook on the belief all those factors will go away soon. The word "temporary" is being tossed around loosely, yes the economic decline is temporary but we need some definition of the word in terms of specifics. The more realistic view, at least in our opinion is that consumers have a long way to go ion repairing their balance sheets and re-adjusting to the "new normal" economy that appears to be ignored by Wall Street. As long as house prices continue to fall and people increasingly lose faith in our political leaders businesses will not increase hiring, unemployment will remain high and the economy will stagnate with only minor growth.

 

Crude oil is falling this morning on the soft jobs report, weaker economic outlook means less oil usage. The DJIA opened at 9:30 down -110, the 10 yr note +21/32 2.96% -7 bp and mortgage prices +15/32 (.47 bp).

 

Will there be a QE 3 from the Fed given the weakening economy? The more important question is; will a QE 3 actually help the economy? QE 2 didn't help much as is evident by recent data, housing still in depression and unemployment increasing again. The Fed;s QE 2 pushed investors into the equity markets, but did noting to help consumers or the all-important housing markets. Low interest rates are welcome, however the level of interest rates are not the issue. 

 

At 10:00 the May ISM services sector data; the overall index expected at 54 frm 52.8 in April, actually increased to 54.6. New orders up to 56.8 frm 52.7, prices pd 69.6 frm 70.1 and employment 54.0 frm 51.9. The report is the best report seen in the past two weeks on the economy. it wasn't huge but anything better will keep interest rates from declining much the rest of the day. The initial reaction helped the stock indexes off their worst levels and took a few clicks off the 10 yr and mortgage prices.

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Rate markets started slightly weaker this morning, the bellwether 10 yr note still unable to crack 3.10% closing yesterday at 3.11% and at 8:45 this morning at 3.13%. Mortgage prices also a little weaker, -4/32 (.12 bp) at 8:45. Asian stock markets were lower on soft earnings, Europe's stock markets trading weaker and US stock indexes looking soft into the 9:30 open. Crude lower to start the day while gold a little higher. 

 

At 8:30 April durable goods orders were a lot weaker than thought; orders expected down 2.0% fell 3.6% after increasing 4.4% in March, the decline in April the biggest since Oct 2010. When transportation orders are excludes durables fell -1.% against estimates of an increase of o.5%; ex defense orders -3.6% (-0.4% expected), the largest decline since Jan 2009. Durables are the most volatile series we deal with each month and subject to big revisions, no initial market reaction to the weaker report, but as the clock ticked the interest rate markets held well; at 9:15 mtg prices +1/32 (.03 bp).  

 

At 9:30 the DJIA opened weaker, down 35, the 10 yr +2/32 at 3.11% and mortgage prices +2/32 (.06 bp).

 

At 10:00 March FHFA housing price index, a series that doesn't mean a lot in that housing is still dragging the US economy down and there is nothing on the immediate horizon that will change. The index as reported a decline of 0.3% after a decline of 1.5% in Feb.

 

Early this morning the weekly MBA mortgage applications. Applications increased 1.1% from one week earlier. The Market Composite Index, a measure of mortgage loan application volume, increased 1.1 percent on a seasonally adjusted basis from one week earlier. The Refinance Index increased 0.9% to its highest level since December 10, 2010. The seasonally adjusted Purchase Index increased 1.5% from one week earlier. The unadjusted Purchase Index increased 0.8% compared with the previous week and was 3.1% higher than the same week one year ago. The four week moving average for the seasonally adjusted Market Index is up 5.2%. The four week moving average is up 1.2% for the seasonally adjusted Purchase Index, while this average is up 7.1% for the Refinance Index. The refinance share of mortgage activity increased to 66.8% of total applications from 66.7% the previous week. This is the highest refinance share since January 28, 2011. The adjustable-rate mortgage (ARM) share of activity decreased to 5.8% from 6.3% of total applications from the previous week. The average contract interest rate for 30-year fixed-rate mortgages increased to 4.69% from 4.60%, with points decreasing to 0.69 from 0.93 (including the origination fee) for 80% loans. The average contract interest rate for 15-year fixed-rate mortgages increased to 3.78% from 3.75%, with points decreasing to 1.04 from 1.22 (including the origination fee) for 80% loans.

 

Yesterday's $35B 2 yr note auction met with strong demand; at 1:00 this afternoon the second of the three borrowing auctions. $35B of 5 yr notes will be sold, after the firm demand for the 2 yr expectations are for another good auction today with investors looking for safety as global equity markets and economic outlooks are being lowered. Not much incentive to invest in stock markets now, commodity prices churning after the purge in the past two weeks.

 

The OECD maintained its forecasts for the world economy to expand 4.2% this year and 4.6% in 2012, and raised them for U.S. growth in 2011 even as it warned of stagflation in some economies. Nice forecast but we are not that optimistic. The OECD warned that the US and Japan have to deal more directly on the respective growing deficits; that of course isn't new news. So far the US has no political appetite to make the serious decisions that are necessary to lower the annual budget deficits; Congress and the Administration have until August 2nd to get an agreement to extend the debt ceiling and come up with a plan that actually cuts spending, likely they won't have anything until August 1st.

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Treasuries and mortgages tried early to hold slight price gains but by 9:00 the 10 yr was a little lower in price and mortgages -3/32 (.09 bp) frm yesterday's close. Stock indexes early were a little better with crude oil and gold higher. Crude being pushed higher this morning on a huge fire in Canada's oil fields where most have been evacuated. No economic releases today except the weekly MBA mortgage applications at 7:00 this morning.

Technically, yesterday the 10 yr note broke its two week resistance at 3.14% to close at 3.11%; so far this morning no follow-through. After the move yesterday we are hearing a lot of talk that the 10 could fall to 3.00%; from a technical perspective it is possible. Fundamentally, the present low level of US interest rates is increasingly difficult to square. Budget deficits continue to increase, China cutting back on Treasury holdings (not much, but it is worth watching), the economic outlook has been ratcheted lower and business borrowing and business sentiment among small businesses (500 and under employees) is declining according to the NFIB recent monthly data. A mixed picture, however the present low rates are hard to justify; pick your view, weaker economic outlook will keep rates from increasing, or that Congress won't end up with spending cuts that are real and deep that would push interest rates higher.

One propellant for the recent decline in rates is built on the view that the softer economic outlook will keep the Fed from increasing interest rates until at least the 1st Q of 2012. The Fed is unlikely to increase rates with little inflationary fears now, but does that in itself justify present low interest rates? The recent decline is mostly a safety move; with equity markets not advancing, commodity price increases are over for the moment, and borrowing demand very weak. Every technical indicator we use in our near term forecasting is bullish, from a trading perspective we are bullish, from a fundamental longer outlook we are not so optimistic. We expect the end is closing in on these low levels, that said we are not expecting a rapid increase in rates----a slow grind higher. For now take advantage of the gifts mortgage rates are providing.

Mortgage applications increased 7.8% from one week earlier, according to data from the Mortgage Bankers Association’s Weekly Mortgage Applications Survey for the week ending May 13, 2011.  The Refinance Index increased 13.2% from the previous week and is at its highest level since the week ending December 10, 2010.  The seasonally adjusted Purchase Index decreased 3.2% from one week earlier and was 1.7% lower than the same week one year ago. The four week moving average for the seasonally adjusted Market Index is up 3.6%.  The four week moving average is down 2.9% for the seasonally adjusted Purchase Index, while this average is up 7.2% for the Refinance Index. The refinance share of mortgage activity increased to 66.7% of total applications from 63.1% the previous week. This is the largest refinance share observed since late January. The adjustable-rate mortgage (ARM) share of activity decreased to 6.3% from 6.5% of total applications from the previous week. The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.60% from 4.67%, with points decreasing to 0.94 from 1.10 (including the origination fee) for 80% loans.  This is the lowest 30-year rate recorded in the survey since the end of November 2010. The average contract interest rate for 15-year fixed-rate mortgages decreased to 3.75% from 3.81%, with points increasing to 1.22 from 1.05 (including the origination fee) for 80% loans.  This is the lowest 15-year rate recorded in the survey since early November 2010. 

Later today (2:00) the minutes from the 4/27 FOMC meeting will be released. Bernanke held a press conference after that meeting covering much of what the FOMC discussed so the minutes this afternoon will not likely present anything surprising.

The stock market trading close to unchanged so far; if the key indexes fall the interest rate markets will continue to improve. Crude oil and gold higher this morning, crude on the fires in Canada.


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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.

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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.

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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.


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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.

---www.tbwsratealert.com---

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Crude oil is up again this morning, the same struggles in Libya but over the weekend focus has shifted slightly to Saudi Arabia, the giant in the room when it comes to oil prices and Mideast unrest. Dissidents in Saudi Arabia have called for a protest on Friday, so far the Saudi situation has not been a direct factor for oil markets therefore for all markets; that there is an organized protest coming is heightening fears that it may lead to some form of revolution. While we don't believe it is likely, the demand for oil versus supply is so tight it doesn't take much to send prices higher. Websites have called for a nationwide “Day of Rage” on March 11 and March 20, according to Human Rights Watch. Unrest in the region is increasing, in Libya war between dissidents and Qaddafi increased over the weekend.

Crude at 9:13 this morning up $1.23 at $105.65 (see below for 10:00 price). The US stock market is opening better this morning, somewhat out of character with oil prices increasing. Recent trade in equities has been selling on higher oil prices based on the view that as energy prices increase the economy will cool. So far not the case today, apparently some investors don't believe higher energy costs will actually cool of consumer spending. We do not subscribe to that view; the economic recovery remains questionable as to its strength and sustainability with high unemployment, depressed housing sector and only a moderate increase in consumer debt expansion. $4.00/gallon gasoline will have a dampening impact on consumers here and around the globe. Later this afternoon Jan consumer credit will be released, looking for an increase of $3.3B, not much.

This Week's Economic Calendar this week is thin on data:

        Monday;

           3:00 pm Jan consumer credit (+$3.3B)

        Tuesday;

           1:00 pm $32B 3 yr note auction

        Wednesday;

           7:00 am weekly MBA mortgage applications

           10:00 am Jan wholesale inventories (+1.0%)

           1:00 pm $21b 10 yr note auction

       Thursday;

           8:30 am weekly jobless claims (+14K to 382K; con't claims 3.750 mil frm 3.774 mil last week)

                  Jan trade deficit (-$41.5B)

          1:00 pm $13B 30 yr bond auction

          2:00 pm Feb Treasury budget (-$196B)

      Friday;

          8:30 am Feb retail sales (+1.0%, ex autos +0.6%)

          9:55 am U. of Michigan sentiment index (76.5 frm 77.5)

          10:00 am business inventories (+0.8%)

Gold futures for April delivery rose as much as $16.10, or 1.1%, to $1,444.70 an ounce and were at $1,443.60 at 8 a.m. on the Comex in New York. Prices beat the previous high of $1,441 set March 2 and gained the past six weeks, the longest winning streak since September 2007. Safety moves on Libya's increasing violence and increasing fears of inflation. Inflation fears are always with us especially with concerns over how high commodity prices will go as most commodities keep moving higher. Last week Trichet said the ECB may increase interest rates as inflation is increasing; we don't see it here because markets and the Fed refuse to recognize the implications from increasing food and energy prices; if we don't want something we simply refuse to pay it much attention.

The equity markets are shaking short term traders a little this morning, rallying when oil is increasing. Recently its been easy; sell stock indexes on higher oil, buy when oil is lower. The bond and mortgage markets are pressured this morning on oil prices, the stock market better and this week's $66B of borrowing by Treasury. The bellwether 10 yr is swinging in a 20 basis point yield range taking mortgages with it. Both markets remain bearish for the longer term. Unless the economy flips, and that isn't likely, the path for interest rates is up. Those sitting and waiting for substantially lower mortgage rates are going to end up disappointed; as we have noted previously the likelihood of much lower rates doesn't look good now.

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Treasuries and mortgages opened weaker this morning with little new developments in the Mid-East. After weeks of increasing protests from citizens in many Mid-East countries last night it was relatively quiet. As we noted previously, interest rate markets are increasingly concerned about the increasing strength of the economy and now after Jan PPI and CPI the worries over inflation have momentarily increased. Without safety moves into treasuries lead by the what is happening in the Mid-East the bond market will re-focus on domestic economic conditions and the potential that producers and businesses will begin to increase prices after absorbing them for months. At some point the increases in commodities will have to be passed on to consumers; we believe we are getting closer each day.

If price increases begin to surface to consumers it will likely begin in food prices, most every food commodities have increased dramatically. While the Fed continues to focus only on inflation that excludes food and energy as its gauge of inflation, and discounts much of the increases in commodities, sooner rather than later prices across the spectrum will begin to increase. Prices of non-food commodities are increasing as well; aluminum, copper, platinum, silver, oil, all have seen huge price increase as well. Once manufacturers and businesses can no longer absorb input price increases, and they are coming close, the fears of inflation will quickly rise. With interest rates as low as they are it won't take much to open the flood gates. Food prices in some areas are already being passed on in the form of lesser quantities for the same money.

There are no economic releases scheduled today, and Monday is a holiday for the bond and mortgage markets (President's Day). Looking ahead; next week Treasury is back to borrowing, Jan existing and new home sales lead the headlines. On Tuesday Treasury will auction $35B of 2 yr notes, Wednesday $35B of 5 yr notes and Thursday $29B of 7 yr notes. The total at $99B is the same as last month and the same since last Oct. As long as there is quiet in the Mid-East the bond and mortgage markets will not likely improve much and more likely see some pressure within what we now believe is a new range; basis the 10 yr note between 3.75% and 3.50%.

...."The Federal Reserve is committed to its long-standing practice of ensuring that all of its rulemakings are conducted in a fair, open, and transparent manner. Accordingly, we are disclosing on our public website summaries of all communications with members of the public--including banks, trade associations, consumer groups, and academics--regarding matters subject to a proposed or potential future rulemaking under the act....." Bernanke before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate yesterday. Bull! The Fed is completely ignoring the mortgage broker industry, trying to dictate how originators are paid with little or no regard to the impact on professional mortgage originators that don't want to work for a bank....socialism from the Fed. Bernanke says the right things but doesn't actually back it up. Non-bank mortgage lenders are ignored in favor of those large banks that the Fed and Comptroller of the Currency regulate. Bernanke knows full well where most of the blame lies for the sub prime crisis that almost collapsed global economies.

....."The preferences of foreign investors for highly rated U.S. assets, together with similar preferences by many domestic investors, had a number of implications, including for the relative yields on such assets. Importantly, though, the preference by so many investors for perceived safety created strong incentives for U.S. financial engineers to develop investment products that "transformed" risky loans into highly rated securities. Remarkably, even though a large share of new U.S. mortgages during the housing boom were of weak credit quality, financial engineering resulted in the overwhelming share of private-label mortgage-related securities being rated AAA. The underlying contradiction was, of course, ultimately exposed, at great cost to financial stability and the global economy....."  Ben Bernanke at the Banque de France Financial Stability Review Launch Event, Paris, France this morning. The Fed will admit the sub-prime mortgage disaster was primarily the responsibility of Wall Street but still is trying to lay much of it on mortgage originators with its attempt to rule how LOs are compensated, aligning itself with the large banks that are dead set on taking control of all mortgage lending that will without any doubt cost consumers more.  

courtesy - www.tbwsratealert.com

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