Prior to 8:30 the rate markets were lower in price; the 10 yr -6/32 and mortgage prices -5/32 (.15 bp). At 8:30 two very key data points pushed prices and rates back to unchanged briefly. Dec retail sales were weaker than expected, up 0.6% against +0.7% thought, ex auto sales up 0.5% with forecasts of +0.6%, ex autos and gasoline +0.4%. One of the keys to the optimistic outlook for this year is consumer spending that is expected to increase; the Dec sales while not bad were not as strong as thought and leads to concerns that Jan won't be strong either. We have noted in previous comments that we are withholding our judgment on 2011 until we see how consumers are doing in Jan after the Christmas shopping. 

Also at 8:30 Dec consumer price index, expected up 0.4% increased to 0.5%, ex food and energy up 0.1% in line with estimates. The headline CPI was the highest since June 2009. yr/yr CPI +1.5%, ex food and energy +0.8%. Inflation so far remains subdued but markets will still worry over it. 

More data at 9:15. Dec industrial production expected +0.5% jumped 0.8%. Capacity utilization in Dec was expected at 75.6%, it increased to 76.0% the highest factory use since Aug 2008. Nov use was revised from 75.2% to 75.4%. Prior to the two reports the 10 yr note was yielding 3.29% and mortgage prices were up .12 bp. Rate markets moved slightly better on the initial reaction, a little surprising given that both were better than estimates. At 9:20 the 10 yr yield at 3.276% and mortgage prices +.15 bp.

At 9:55 the U. of Michigan consumer sentiment index, expected at 75.0 frm 74.5, was lower at 72.7---very disappointing. The current conditions index fell to 79.8 frm 85.3 at the end of Dec; the 12 month outlook however jumped to 87 frm 79. The initial reaction lent support to the bond and mortgage markets.

Finally, at 10:00 Nov business inventories, expected +0.7%, came at +0.2%. Sales were up 1.2% with a 1.25 month supply from 1.27 months in Oct.

The two reports at 9:55 and 10:00 added more buying in treasuries and mortgages sending the 10 yr note to the very critical 3.25%/3.26% level and mortgage prices +25 bp on the day slightly better than at 9:30.

European stocks retreated for a second day, led by a selloff in commodity producers, after China moved to cool its overheating economy. Asian shares and U.S. index futures fell. Inflation in Germany, Europe’s largest economy, accelerated to the fastest pace in more than two years in December, data from the Federal Statistics Office in Wiesbaden showed today. European Central Bank council member Axel Weber said the economic outlook in the euro area has improved markedly and inflation risks “could well move to the upside.” (Bloomberg News)

Crude oil and gold are trading lower this morning on China's moves to cool their economy raising their bank reserves; the declines helping the interest rate markets.

Markets today will have to consider that US markets will be closed on Monday (MLK). Generally major moves are unlikely with a holiday that closes our markets.

The bellwether 10 yr note is now traded at its key five week resistance level at 3.26%, the lowest rate we have had since 12/20 when the note fell to 3.25% but closed at 3.35%. T As we have said, a close below 3.25% for the note will likely set up a nice improvement in mortgage rates. There is still a lot of trading left today, as noted in the hold/lock advise, today and Tuesday will be critical from a technical perspective.  


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