Prior to 8:30 when Feb retail sales were reported the 10 yr note at 2.00% was -2 bp and 30 yr MBSs were up 6 bp frm yesterday's close. Retail sales for Feb was expected to be a little soft on concerns the payroll tax increase might continue slow spending seen in January. The estimate for overall sales was +0.6% and when auto sales are extracted, up 0.2%. Sales increased 1.1% and ex-auto sales +1.0%. Feb sales ex-autos and gasoline were up 0.4%. Jan overall sales was revised to +0.2% frm 0.1% and ex-auto sales from +0.2% to +0.4%. The stronger sales report turned markets; at 8:45 the 10 yr note -5/32 at 2.04% +2 bp frm yesterday's close and 30 yr MBS price down 9 bp frm the close yesterday. US stock indexes were weaker prior to 8:30, at 8:45 back to unchanged. Feb retail was the strongest in the last five months, adding more conviction the economy is improving.

The Feb employment report last week also was better than markets were expecting, now retail sales adds to the optimism that recovery is happening quicker than thought. Even the Fed should be surprised with the number; the Fed has continued to say the economy is improving but not as rapidly as retail sales and the Feb employment data has indicated. Eight of 13 major categories in the sales report showed increases last month, led by a 5% jump in receipts at gasoline stations that reflected higher fuel costs. Sales also climbed at building materials outlets, auto dealers and general merchandise stores. Next week the FOMC will meet on Tuesday and Wednesday with the policy statement released Wednesday afternoon; how will the Fed frame the recent firmer data? Bernanke will likely hold that the economy still has soft spots and that unemployment is still too high. The Fed will continue the QE buying of $85B of treasuries and mortgages, in the eyes of the Fed the easing is helping and it will continue for months ahead.