Treasuries and mortgages started generally unchanged this morning; stock indexes traded higher. At 9:00 the 10 yr note +4/32, mortgage prices unchanged from yesterday's close. The only thing on minds now is the Fed QE 2 easing that the Fed said last week they may engineer (if necessary). Markets have taken the comment from the FOMC statement as a fait accompli, that more easing is going to happen. Now this morning in the WSJ comes an article that the Fed plans may be to ease slowly and not a helicopter move by announcing a massive easing move. Until the Fed acts markets will continue to assume an easing move has already decided, that may be a dangerous assumption but at the moment there is high consensus the Fed will act soon. 


By the open of equity markets at 9:30 the DJIA flipped and was under pressure; by 9:40 10 minutes into the trading the index was down 40 points. The 10 yr at 9:00 +4/32, at 9:40 +13/32 and gaining, mortgage prices at 9:30 +3/32 , at 9:40 +5/32 (.15 bps from yesterday's close.


Debate on whether another easing move is the right thing to do is wide spread; most believe it will help while an increasing view that it won't help is dominating markets now---at least the debate. One argument against another easing is that it will not increase inflation and just buying more treasuries or other debt instruments doesn't create new money, it just takes liabilities and assets from the private sector and transfers it to the Fed balance sheet with no stimulating impact. The opposite view; that more easing by the Fed purchasing treasuries and possibly other debt will push more lending by banks and give the recovery a necessary boost. So, the Fed is borrowing money from banks and the Treasury to buy assets. All this does is shift what would have been held in the private sector onto the Fed's books. This is not the creation of new money and therefore does not create inflation or lift aggregate demand. For the Fed, growth means printing money. Currency is an organic liability, created by the Fed, which is then used to purchase assets. This is the traditional means of money expansion--the creation (or printing) of new money. That is the general argument against easing, it doesn't create new money. Frankly; I must admit that I get somewhat lost in the arcane details of some monetary policies, but I still fall in the camp that the easing by the Fed should be something different than just buying more treasuries; lower interest rates in my view will not stimulate economic growth----but we'll see.


Case/Shiller July home price index was in line, +3.2% for the 20 city prices, +4.1% for the 10 city prices. No reaction to the report. Shiller commented that sales are sluggish and don't show much overall improvement.


At 10:00 Sept consumer confidence index from the Conference Board was expected at 52.5, was hit hard, down to 48.5 the lowest since last Feb. The 12 month out expectations also took a big hit, down to 65.4 from 7.6. The reaction is as you would expect; stock indexes fell and rate markets added more to their rally.


At 1:00 Treasury will auction $35B of 5 yr notes; yesterday's 2 yr auction was well bid as it most always is. The 5 yr today is expected to meet equally strong demand.


The 10 yr note is edging ever closer to its low yield seen in late August before treasury rates increased on better August employment data and firm manufacturing reports. The intraday low yield hit 2.42% but closed that day over 2.50%; this morning the 10 at 2.49%, mortgages meanwhile are not moving much and likely will have to have a huge decline in the 10 yr note to see rates fall in any significant way.


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