It is a massive dumping of US treasuries, selling has been exceptionally strong the past week and about the only hope now is that the momentum oscillators are reaching oversold levels. The bond market is seen now as the least desirable investment compared to equities and commodities. The Fed's continual comments that the inflation rate is too low have finally flipped investors and traders; along with the complete failure of QE 2 to push rates lower. Unless there is a huge negative economic decline the end has come for low rates; this morning at 8:30 Oct retail sales, expected up 0.7%, jumped 1.2%, ex auto sales +0.4% as expected. Stronger sales drove the stock indexes a little higher implying a better open ion stocks at 9:30. 


Also at 8:30 the NY Empire State manufacturing index hit; very weak at -11.4 frm +16.73 in Oct. Markets ignored the huge decline with the excuse that NY is not a big manufacturing state. Heard that many times before, but curious that when the regional report is better than expected there isn't any of that kind of reaction. The sub-components in the rep-ort were equally weak; employment index fell to 9.09 frm 21.67, new orders fell to -24.38 frm +12.90 and prices received at -2.60 frm +8.33. ( any index over zero is considered expansion, under zero contraction).  


At 10:00 Sept business inventories, expected up 0.9%, hit right on at +0.9%; final sales up 0.5%. The inventory to sales ration 1.27 months unchanged from Aug. The DJIA dropped a little on the report and rates markets saw a slight bounce.


Congress gets back to business today, if that is what we can call it; a lame duck session with 100 new members in the House isn't expected to accomplish much. The only issue that needs to be acted on is the extension of the Bush tax cuts set to run out at the end of the year. Likely there will be an extension for a short period until next year when the real work and political bickering gets started. Washington is not working! Yet so far there isn't much evidence that it is about to change. Voters tossed out Democrats, just as two years ago they tossed out Republicans, still politicians appear clueless as to what has to be done by both parties.


The recent increase in US interest rates is among other issues reflective of the world's disappointment that the Fed decided to print another $600B. Criticism is widespread and is one factor driving rates higher now. China has downgraded its credit rating for US debt; S. Korea ignored and refused US pressure fro a new trade deal, Europe and Asian countries are protesting the QE move. The underlying view of the US now is that our political system is unable to come to any meaningful consensus on most of the very critical problems we face. Last week the bi-partisan commission set up by Pres Obama to study and come up with ideas to begin witling away the US exploding deficit was summarily dismissed by both parties almost immediately as unworkable. The world is watching and what they see is Washington castrated and lead around by special interests while the US fiddles away.


This Week's Economic Calendar:


            8:30 am Oct retail sales +1.2%

                         NY Empire State manufacturing index -11.4

           10:00 am Sept business inventories


           8:30 am Oct PPI (+0.8%, ex food and energy +0.1%)

           9:15 am Oct industrial production (+0.3%)

                        Oct capacity utilization (74.9% frm 74.7%)

          10:00 am NAHB housing index (15.0 frm 16.0)


          7:00 am MBA weekly mortgage applications

          8:30 am Oct CPI (+0.3%, ex food and energy +0.1%)

                       Oct housing starts and permits (starts -1.7%, permits up 4.6%)


         8:30 am weekly jobless claims (+7K to 442K)

        10:00 am Oct leading economic indicators (+0.6%)

                      Nov Philadelphia Fed business index (+4.5 frm +1.0 in Oct)


At 9:30 this morning mortgage prices were down 20/32 (.62 bp) by 10:00 a little better, down 13/32 (.41 bp). The rate markets are oversold with the massive selling over the last week; expect some support in the near term but the trend is decidedly bearish and rates will likely move higher over the next few months unless there is a huge change in economic outlook or the Fed jawbones that inflation, while expected to increase as it wants, won't be allowed to head much higher. Unlikely though that the Fed has as much jaw power it usually has after what presently looks like a failed attempt to stimulate the economy. There are however some out there that are touting the success of QE 2 already with increases in inflation fears. Investors are paying eight times more than in April for options on interest-rate swaps that protect against rising yields relative to those that bet on them falling. Bonds that compensate for higher consumer prices also show heightened inflation expectations.




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