Very early today the 10 yr note was better with the yield down to 2.47% down 1 bp from yesterday; it didn’t last however, at 8:30 the 10 yr yield increased to 2.50% with US stock indexes working lower early after the strong improvements over the last few days. Mortgage prices at 9:00 -20 bps frm yesterday’s close.

At 9:30 the DJIA opened -72, NASDAQ -11, S&P -6. 10 yr at 2.54% +6 bp and 30 yr MBSs -50 basis points. No real let up in underlying volatility, and it will continue through next week at least.

Over the last couple of days, and after the shock to markets from Bernanke’s comments last week, Fed officials are out to cool off the fears. Three Fed officials yesterday making comments that the Fed was still uncertain about what will happened with the QEs. Bernanke last week said the Fed would begin to taper by the end of the year pending how the economy performs. The Fed’s outlook for the economy is optimistic, that the economy is recovering and the Fed will begin backing away. Since that remark the markets convulsed into panic; interest rates increased, the stock market fell---both on significant moves. Then it was the Fed’s turn to be shocked, Bernanke’s remarks were not expected to crash markets and set of the volatility. Now the Fed is out attempting to calm markets with less hawkish comments from the likes of NY Fed Pres. Dudley yesterday and other Fed officials out making speeches.

There has been some relaxation in the bond market, the 10 yr note yield has declined from 2.65% to 2.50% early this morning but the bearish bias remains intact. Unless the US and global economies reverse and weaken the bond and mortgage markets are not likely to improve much. It is all about how the economy performs in the coming months; Bernanke made it clear in his remarks last week that the Fed’s actions moving forward is dependent on data measuring the economy’s performance. Initially no news chose to focus on that aspect, setting off the hysteric moves last week. Now some balance being worked into the equation, but not much and the market volatility will continue with wide swings. Don’t allow yourself to believe rates will fall much; the trend is for higher interest rates, or at best trade at present levels. Bottom line: the Fed believes the economy is improving, the track record at the Fed on economic forecasting isn’t stellar by any means and markets know it. Taking the interest rate forecasts to its lowest denominator in terms of outlook---it all depends on the economy. Our view, the economy isn’t as strong as the Fed thinks, if we are correct interest rates should stabilize at present levels. That said, it isn’t our view or the Fed’s outlook that is important it is what markets think.

Two data points this morning; at 9:45 the June Chicago purchasing managers index, expected at 55.0 from 58.7 in May, the index declined to 51.6. The decline is counter to the increases seen in other regional indexes as most have been better but Chicago isn’t Richmond, there are many more manufacturing operations in the Chicago region. The reaction sent stock indexes down more but didn’t do lot for the bond and mortgage markets. At 9:55 the final June U. of Michigan consumer index was expected at 83.0 from 82.7 at mid-month, the index increased to 84.1. The final reading for the May index was 84.5 so on a month to month view the index declined. The report sent stock indexes down more, but didn’t improve the bod and mortgage markets.  

- Michael Corboy