Stock indexes prior to the 9:30 open were a little better, the 10 yr note yield at 1.72% +1 bp, 30 yr MBSs +5 bp. At 8:30 the Dec Empire State manufacturing index was expected at 0.0, it fell to -8.10 frm -5.2 in Nov. The report showed no effect from Hurricane Sandy or the aftermath. The report for December is filled with negatives that include contraction for new orders, unfilled orders, and employment. The 12-month outlook is still positive but is far from robust. There was no noticeable reaction to the weak report. The Cliff is getting closer; over the weekend Republicans agreed to increase taxes on millionaires. So far no comments from the Administration, a fig leaf but with Obama insistent on taxing those that make $250K it's a big step down to millionaires. Obama rejected a Dec. 14 offer by Boehner to raise rates on household income above $1 million a year and lift the federal debt ceiling in exchange for containing entitlement program costs. With the Cliff now two weeks away and little to no progress, some now saying Republicans may accept going over it. The thought is it would give Obama some cover on his pledge of increasing taxes for high income earners. $600B of spending cuts would be triggered if we go over the Cliff. Obama also wants total control over extending the debt ceiling while Republicans say any increase in the debt must be accompanied by cuts in spending greater than the amount of any increase in the debt ceiling. The federal debt limit is expected to reach its limit in February. So far markets are not taking going over seriously; stock indexes holding and interest rates slightly higher over the last week.

This afternoon Treasury will auction $35B of 2 yr notes, the first of three consecutive auctions this week. Tomorrow $35B of 5s and Wednesday $21B of 7s.

At 9:30 the DJIA opened +31, NASDAQ +6, S&P +4. The 10 yr at 9:30 -3/32 at 1.72% +1 bp; 30 yr MBS +5 bp.

Nothing on the calendar the rest of the day. Markets will be on alert for any comments on the Cliff talks. As noted above as the end of the year approaches there is chatter that politicians may let the country go over the Cliff. A game of chicken played out by Republicans now thinking people may put increasing lames on the Administration when all taxes will increase because a deal could not be worked out. It is however a quickly moving target. That rate and equity markets are rather subdued is curious given the implications of Cliff consequences. Unless there is an agreement the Congressional Budget Office is saying it may lead to a recession in the first half of 2013; something we believe neither political party wants to see.