Treasuries and mortgages opened stronger this morning; some minor short-covering and coming off very oversold market conditions. No movement in the equity markets in early activity after the strong rally yesterday. At 8:30 the DJIA +5, the 10 yr note +7/32 at 3.79% -3 BP, mortgage prices +9/32 (.28 bp). At 9:00 the 10 yr +7/32, mortgages +9/32 (.28 bp) and the DJIA -1 point. At 9:30 the DJIA opened -30, the 10 yr note +8/32 and mortgage prices +10/32 on 30s and +7/32 on 15s.

Two data points this morning; Nov factory orders at 10:00, expected to be +0.5% were up 1.1% the third month in a row orders have increased. Nov pending home sales, expected to be down 3.0% were reported off the cliff, down 16.0% ; the first decline since last Jan. The decline a result of would-be home buyers delaying decisions until the tax credit extension was made a reality. The incentive for first-time homebuyers, originally scheduled to expire at the end of the month and subsequently extended through April and broadened to include some existing home buyers, is stabilizing sales. Pending home sales are sales with contracts signed but not yet closed. Dec pending sales are likely to be better.

On the 10:00 data there wasn't much initial reaction to the higher factory orders and decline in Nov pending home sales. This afternoon we will get Dec auto and truck sales. Increasing voices calling for the Fed to begin exiting the monetary stimulus now and not wait.

Stephen Roach, Morgan Stanley's Asian chair is calling for Bernanke to begin removing emergency stimulus measures now if the economic recovery is as strong as the Fed says it is. With slow but increasing concern, more economists are stepping up to chide the Fed not to wait too much longer to avoid another bubble creation that low interest rates have caused. "The longer they wait, the greater the chance they sow the seeds for the next bubble. So I'm in favor of an early exit strategy." "We've seen the most extraordinary monetary stimulus on the record in the 15, 16 months post-Lehman Brothers," Roach said. "We'll have to see the most extraordinary withdrawal of stimulus on record" and "if this recovery is as strong as Bernanke and markets think it is, the time to exit is now." Over the weekend Bernanke in a speech in Atlanta was adamant that monetary policy of very low rates did not cause the sub prime mortgage meltdown; a view hard to square in our view.

Interest rates jumped 60 basis points on the 10 yr note in Dec, mortgages up about 50 basis points.

Too much, too quick; yesterday and this morning traders are covering their large short positions based on the continuing belief the Fed will not tighten for months. With increasing regularity however, there are growing calls for the Fed to move sooner rather than later to avoid the potential of an inflation spiral. Unlikely inflation will be a serious problem this year, but after low interest rates drove investors into one of the wildest frenzies of speculation in decades fear of another bubble persist. Unwarranted fears are multiplying; it is very unlikely another bubble will emerge but the fear of it is not about to lessen as long as the economic outlook continues to be positive. Unemployment is not likely to recover quickly, possibly not much improvement for this entire year. Low rates compared to historic standards are likely to persist but higher than what we have currently. Futures trading in Chicago showed a 52% chance that the Fed will raise its target lending rate by at least a quarter-percentage point by its June meeting, compared with 60% odds a week ago.

Both Case and Shiller of the Case/Shiller home price index are forecasting a jump in foreclosures in 2010 on prime mortgage loans. So far the spot light has been on sub prime defaults; in 2010 the two housing experts are pointing to a big increase in so-called prime mortgages as unemployment remains high through all of 2010. The number of prime mortgages overdue by at least 60 days more than doubled in the third quarter from a year earlier to 838,000, according to a Dec. 21 report from the Office of the Comptroller of the Currency and the Office of Thrift Supervision. Unemployed homeowners struggling to pay their bills will default on their home loans and increase foreclosures, Shiller from Yale and Wellesley College's Case said.