Treasuries and mortgage markets started weaker this morning prior to 8:30 data. At 8:30 three data points were released. Jan retail sales were lower than expected at +03% against +0.6% expected, excluding auto sales up 0.3% also against estimates of +0.5%. We question the reliability of the data, as noted previously severe weather in most of the country in Jan likely distorted the data. Whether the sales would have been better or worse due to the weather is difficult to interpolate. Dec retail sales were revised slightly lower but not much.

The second report this morning, the Feb NY Empire State manufacturing data; the overall index was expected at 15.0 frm 11.92 in Jan, as reported it increased to 15.43. The new orders component fell however, to 11.8 frm 12.29; employment also fell, to 3.6 frm 8.42 and prices pd increased to 45.78 from 35.79. Overall the NY report didn't quite meet expectations.

The third report at 8:30; Jan export and import prices; import prices for the month increased 1.5% while export prices were up 1.2%. Yr/yr import prices increased 5.3% while yr/yr export prices increased 6.8%.

Weaker retail sales and softer NY Empire State manufacturing put a bid in the rate markets, prior to the 8:30 releases the 10 yr note traded off 7/32 and mortgage prices were down 5/32 (.15 bp). At 8:45 the 10 moved to unchanged on the day and mortgage prices improved to unchanged.

At 9:30 the DJIA opened -29, the 10 yr note -3/32 and mortgage prices -2/32 (.06 bp).

Dec business inventories rose 0.8% slightly better than 0.7% expected. Sales were up 1.1% with the sales to inventory ration at 1.25 months unchanged from Nov.

The final data point today, at 10:00 the NAHB housing market index, expected unchanged from Jan at 16, was at 16 the 4th month at that level.

As you know, markets are continuing to fret over inflation levels; in the US we don't see it but in England the inflation rate announced this morning was double what the Bank of England wants; up 4.0%. While we don't see it yet in the US Europe's and China's rates are increasing. Even with little inflation here, the increases in inflation around the globe will add additional pressure to US bond markets.

Yesterday the budget battle started with the Administration's 2012 release of it's budget. As noted yesterday, it is dead in the water from the start. A baby step that doesn't mention the entitlement programs that must be cut to bring down the expanding annual deficits. This yr the deficit is estimated at $1.5T and may actually exceed that amount. The first shot yesterday came from the Sec of Defense, Gates; he isn't happy with cuts to military projects for new planes and other weapons. Imagine when someone in power actually starts talking about cuts in entitlements. Unless our deficits are brought under control and are believable to foreign investors that fund our shortfall US interest rates will increase to double digits within two years. Without the world funding the US deficits the long term outlook for US interest rates and the economy is not good to say the least. In the end we are left with the question; who will take up the battle (politicians) and put the country's interest ahead of their individual interests? 

The outlook for interest rates is still for a gradual move higher, however we continue to hold that rates won't increase much. The 10 yr note no higher than 4.00% and 30 yr mortgages holding at 5.5%.



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