Prior to 8:30 this morning the 10 yr note traded up 12/32 to 2.11% -5 bp frm yesterday's close; the MBS market up 4/32 (.12 bp).At 8:30 Sept PPI took some wind away, the overall PPI increased by 0.8%, markets were expecting an increase of 0.2%. The core rate however was in line up 0.2%. Yr/yr data is where the cheese binds; up 6.9% on the overall, up frm +6.5% in August, yr/yr on the core was +2.5% unchanged from August. While inflation isn't on the radar now, with the increase in the overall PPI and the core at what the Fed considers neutral (not too hot but not too tame either) inflation concerns notched up fractionally in the backs of the minds of traders. Inflation in Britain is at a three year high and may translate into the trading of US treasuries at the long end particularly. At 8:45, 15 minutes after the PPI mortgage prices traded unchanged on the day.

By 9:00 the early strong rally in the bond and mortgage markets had vanished;the 10 yr unchanged and mortgage prices down 3/32 (.09 bp). In early trading in stock indexes were lower (DJIA -50), at 9:00 the key indexes had improved to point to a firmer open at 9:30. Treasury and mortgage markets are completely controlled by how stock markets trade; with the huge volatile swings in the indexes trading bonds and MBSs keeps the rate markets volatile.

At 9:30the DJIA opened -27, but the NASDAQ and S&P did open a little better. Mtg prices at 9:30 +1/32 (.03 bp) and the 10 yr note up 4/32 at 2.14% -2 bp.

At 10:00 the Oct NAHB housing mkt index,expected at 14, jumped to 18, the highest index reading in months. Last month the index was 14. Any improvement is good news; the line between positive and negative is 50. There has been no initial reaction to the improvement.

Europestill carries heavy weight on global markets as it can't step up and get some kind of resolution resolved.Eventually it will but as has been the case for over a year now, it won't solve the longer term problems. The on again off again travails are the prime drivers in the global markets. In China the economy grew 9.1% in the third quarter from a year earlier, the slowest pace since 2009, driving stocks lower on concern that Europe's debt crisis is dragging on the global recovery. China, an export economy, saw shipments to the European Union tumbled to 9.8% in September from 22% in the previous month. U.S. corporate credit risk rose on concern that Europe's debt crisis may spread after Moody's Investors Service signaled that France's Aaa credit rating is under pressure.

Regardless of all other fundamentals the bond and mortgage markets are tied to stock indexes tighter than a hangman's knot.Moody's saying today it may downgrade France credit rating aided the early morning improvement but with the US equity markets opening better at 9:30, it trumped any safety moves to bonds. It didn't help this morning when over PPI increase by a huge 0.8% and news that Britain's inflation rate the highest in 3 years.

At 1:15 this afternoon Bernanke will speak at a conference at the Boston Fed.With the current increase in rates after Operation Twist that was supposed to keep rates down, traders will focus on any remarks that address inflation and what Bernanke says regarding interest rates. Speculation on remarks about Europe, the economy, and comments on what the Fed is thinking about the mess in Congress and this Administration. He has made it clear the next major steps on reviving the economy must be fiscal, not monetary.

We remind that the bond and mortgage markets are still technically bearish, any improvement on the 10 yr note down to 2.05% area won't change the near term outlook. That said, we continue to expect any selling in the 120 yr note will hold at 2.30%, the recent interday high hit 2.27% last Wednesday and Friday.