Not a good start this morning; the bond and mortgage markets opened weaker with US and Europe stock markets rallying again today. At 9:00 the 10 yr note up 3 bp to 1.70% and 30 yr MBSs -24 bp. European stocks had the first back- to-back gains in a month, commodities rose and the euro strengthened as two German lawmakers said the country is open to Spain seeking a precautionary credit line. Growth in the U.S. economy will probably pick up to 3.5% next year, reducing the unemployment rate to near 7%, Federal Reserve Bank of St. Louis President James Bullard said late yesterday. Headlines like those are not positive for long term interest rates. Spain's 10-year bonds rose, pushing the yield five basis points lower to 5.77% on the comments out of Germany. German bunds fell, pushing the yield seven basis points higher to 1.54%. The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which predicts economic developments six months in advance, climbed to minus 11.5 from minus 18.2 in September.

All the key news early this morning has been negative for the US interest rate markets. At least for the moment the economic outlook has taken a turn for the better. As far as comments from St. Louis Fed Pres. Bullard, it can be taken with a little salt; Fed officials are all over the place on their individual views about the future of the economy. Nevertheless, as we have noted many times, the minute there is a turn in the economic outlook interest rates will climb. It has been our view for the past month that mortgage interest rates are not likely to decline much frm the lows seen a few weeks ago.

8:30 data, Sept CPI was general in line; up 0.6% overall and +0.1% ex food and energy, the core was expected to be up 0.2%. Inflation gets a lot of ink but there isn't any sign of it now or in the immediate future.At 9:15 Sept industrial production and capacity utilization were released. Production expected up 0.3%, increased 0.4%. Factory use it on target at 78.3%. There was no immediate reaction to the data this morning; all focus on Europe and US equity markets.

At 9:30 the DJIA opened +69, NASDAQ +9, S&P +7. The 10 yr note at 1.70% +4 bp; 30 yr MBS price -27 bp frm yesterday's close and down 42 bp frm 9:30 yesterday.

The final data today; at 10:00 the Oct NAHB housing market index, expected at 41, as reported it increased to 41 frm 40 in Sept. This is the fifth straight gain and lifts the index to a five-year high. An optimistic outlook is now the dominant factor lifting the index as six-month sales expectations are up a big eight points to 51. The component for current sales, at 42, is up a solid four points in the month.

Although bonds and mortgages are lower in price this morning, both continue to trade in very tight ranges. On one side the current view is looking a little better for the economy, at least based on Bullard's comments yesterday and the strong retail sales in Sept, on the other side helping to keep long term rates from increasing much the Fed is pumping a lot of money into the system. $40B a month of MBSs and continuation of Operation Twist are countering fears of inflation and the belief that Europe's debt crisis may be easing. The economy still has a lot of headwind however; who will be elected and how will Congress handle the fiscal cliff coming at us quickly?