8:30 Q3 GDP was right on at +2.0% besting Q2 at +1.7%. Although a better Q3 it is still very weak; the Q3 employment cost index up 0.4%, forecasts +0.5%. Final sales in Q3 up 0.6% compared to +0.9% in Q2. The reaction to the data sent treasuries rallying and mortgage prices increasing. Even with the improvement in Q3 there is increasing questioning that the gains are insufficient to cut into the unemployment rate, and adds to the idea that the Fed needs to ease and inflation fears are overdone----at least that is the momentary thought, it swings almost daily. At 9:00 the 10 yr note +11/32 at 2.62% -4 BP and mortgage prices up 8/32 (.25 bp) frm yesterday's close. The DJIA traded weaker prior to the 9:30 open; at 9:30 the DJIA opened -20, 10 yr note +9/32 at 2.64% -2 bp and mortgage prices mixed with 30 yr +7/32 (.22 bp) and FHAs +4/32 (.12 bp).


More data; at 9:45 the Oct Chicago purchasing mgrs index, expected at 57.6, it was better at 60.6 frm 60.4 in Sept. The components were also better than Sept; new orders index at 65.0 frm 61.4, employment index at 54.6 frm 53.4 and prices pd at 68.9 frm 55.0 in Sept, mostly up on energy costs. The was not much reaction in the bond markets to the better report but the stock indexes did manage a little bounce.  


The final data point this week, the U. of Michigan consumer sentiment index was expected at 68.0 frm 67.9, was weaker at 67.7 the lowest sentiment reading since Nov 2009. The 12 month outlook fell to 67 frm 70 two weeks ago; the 12 month inflation outlook at 2.7%. No real immediate reaction to the report.


Moving toward next Wednesday's FOMC meeting and the Fed's announcement of the QE that has been the focal point for traders and investors since the 9/21 meeting when the Fed said it was "prepared" to ease further if necessary. Since that statement it sent rate markets first rallying, then retreating back to levels prior to the comment. There is no doubt in the markets that the Fed will ease by buying treasuries; the concerns are on how much and how quickly the Fed will buy and what the impact may be on the economic recovery and the outlook for inflation. The Fed wants inflation to increase a little to crush out deflation potential, the long end of the yield curve (5s, 10s and 30s) however worry over inflation increasing. And then the dollar; along with attempting to stimulate recovery, the Fed and Treasury want the dollar to decline (although Treasury would never admit it); in the global context it is somewhat of a currency war with central banks trying to weaken their currency to increase exports. Printing money as the Fed will do with the easing has the effect of weakening the dollar as long as it a substantial easing move. The initial reaction to easing sent rates lower, then on concerns of inflation that easing might generate rates swung back. The take away----there is no certainty about the amount of easing, the impact of it on the dollar, on the impact for the economic recovery, or how it will . Gallons of ink and a lot of talk about the easing, yet in the end here we sit right where interest rates were prior to the 9/21 FOMC statement. Some say $500B, some say $1T, some believe $110B a month for six months, a few still hold out for a shock and awe amount; no one wants to bet much on any of the forecasts. 



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