ADVICE: For loans being locked for 15 - 30 days, we suggest...(more)
Yesterday's strong rally in the bond and mortgage markets may have been a little too much too rapidly. This morning treasuries and mortgages are lower in price; at 9:00 the 10 yr note -8/32 at 3.09% +3 bp and mortgage prices -5/32 (.15 bp). The 10 yr note playing with its 200 day moving average at 3.08% closed yesterday at 3.06%; the 4.0 June 30 yr FNMA coupon broke its 200 day average nicely but as long as the 10 isn't holding neither will the mortgage market.

This morning the dollar is weaker therefore the stock market is starting better, as it goes so go treasuries; stocks up, yields up and prices lower. The softer dollar today is increasing the prices of gold and crude oil. Inflation in Germany, Europe's largest economy, unexpectedly eased in May after oil prices dropped from a 2 1/2-year high. The inflation rate fell to 2.4% from 2.7% in April, the Federal Statistics Office in Wiesbaden said today. Economists had expected inflation to hold at the highest level since September 2008, the median of 17 forecasts in a Bloomberg News survey showed. On the month, consumer prices declined 0.2%.

At 8:30 April personal income and spending; both up 0.4% as generally expected. March income revised to +0.4% frm 0.5%; spending revised to +0.5% frm 0.6%. YR/yr overall personal consumption expenditures (PCE) +2.2%, the core PCE +1.0% frm +0.9% in March. Treasuries and mortgages didn't move on the data.

Bill Gross on CNBC this morning commenting that China may be supporting the euro, buying of some of its debt; that comment helped the euro currency against the dollar. Gross, PIMCO's co-CIO, still finds better investments in other sovereign debt over US treasuries; PIMCO holds very little if any US treasuries at the moment, at one point a month ago PIMCO was actually short the US market. Gross pointed out that the real rate of return on US treasuries falls well short of returns that can be achieved in many US stocks based on dividends paid.

At 9:30 the DJIA opened +26, the 10 yr note off its worst level -5/32 3.08% and mortgage prices at 9:30 -4/32 (.12 bp).

At 10:00 the end of month U. of Michigan consumer sentiment index, expected at 72.5 frm 72.4, came at 74.3; current conditions at 81.9 frm 82.5, expectations index at 69.5 frm 61.6. As noted yesterday we do not hold a s much credence in this data point as it is too emotional. those surveyed seem to change their opinions as the price of gasoline goes. Recent declined in gasoline fueled the better index readings.

April pending home sales from NAR, contracts signed but not yet closed, was expected to have declined 1.0%; a huge shock, pending sales fell 11.6% and were down 26.5% from April last year. The reaction to the data rallied the 10 yr back to unchanged and mortgage prices back to unchanged from -4/32 at 9:30 this morning. NAR it the nail squarely, it blames a lot of it on very tight underwriting. In our view underwriting is not just too tight it is absolutely ridiculous.

The G-8 countries out today talking up global economies in the 2nd half of the year. Talk is cheap but it does get the lemmings running, stock markets better this morning led by comments that mimic the G-8 comments. Earlier this week comments from various sources were not so optimistic about the 2nd half of the year as most economic data recently has been much weaker than forecasts. Markets only react to the latest comments; lemmings. We continue our outlook of a soft economy in the 2nd half; high unemployment, home prices falling, consumer spending soft as food and energy prices sap discretionary spending. Have you bought coffee recently?

Yesterday's strong rally in the bond market pushed our momentum oscillators toward overbought levels; ditto for the mortgage markets. Overall the bullish bias remains, but be alert to an increase in price volatility next week. The 10 yr note yesterday at 3.06% has increased chatter that 3.00% will be seen soon; I get nervous after big moves when talk becomes too aggressive as to where a market will go. At these lows we do not want to get greedy, it is unlikely that rates can decline a lot more, so we take it a day at a time and are willing to grab profits quickly.

The bond and mortgage markets will close at 2:00 this afternoon, stocks and other markets will traded their normal hours. Monday of course all markets will be closed.