Last Friday in thin trading the bond and mortgage markets had a nice end of the year with good price gains, this morning with the new year under way the bond and mortgage markets started with selling taking most all of Friday's rally back. Now that the holidays are behind us markets are working back to normal with most all investors and traders back on the job. The last two weeks of Dec were marked with high volatility in the rate markets, after all was done the bond market was about unchanged in the period. 

The equity markets started strong this morning continuing the increasing view that 2011 will be economically better than 2010. At 8:45 the DJIA index traded +84 with the other two key indexes also strong. Stocks also rose on Europe’s benchmark gauge to its biggest advance in almost two weeks. European manufacturing expanded more than initially estimated in December. China’s purchasing managers’ index fell for the first time in five months, suggesting efforts to ,cool the economy are working. Markets in Australia, Japan, New Zealand, Thailand, China and Vietnam were closed today.

Two economic reports at 10:00 this morning; Nov construction spending expected up 0.2% increased 0.4%. The Dec ISM manufacturing index hit at 57.0 from 56.6, expected at 57.3. The sub components were mixed; new orders increased to 60.9 frm 56.6, prices pd increased to 72.5 frm 69.5 and employment declined to 55.7 frm 57.5. The initial reaction wasn't much but the bond and mortgage markets got a minor boost while the DJIA dipped a couple of points; both markets were little impacted. On the indexes any reading over 50 is considered expansion, under 50 contraction; the higher the index the stronger.

This week's economic calendar:


              10:00 am Nov factory orders (-0.2%)

               2:00 pm FOMC minutes from Dec 15th meeting

               3:00 pm Dec auto and truck sales (3.7 mil autos, 5.3 mil trucks)


              7:00 am weekly MBA mortgage applications

              8:15 am ADP private jobs report for Dec (+100K)

              10:00 am Dec ISM services sector index (55.7 frm 55.0 in Nov)


              8:30 am weekly jobless claims (+17K to 405K; con't claims 4.07 mil frm 4.128 mil)


              8:30 am Dec employment report (non-farm jobs +132K, private non-farm jobs +142K, unemployment rate 9.8% unchanged)

              3:00 pm Nov consumer credit (-$2.5B)

The overwhelming consensus as the year begins is that the equity markets will have strong gains, commodity prices will continue to increase with some talk that crude oil will climb over $100.00, and money will continue to exit fixed income treasuries in favor of stocks. As noted previously we are more skeptical about the economic outlook than the consensus. The economy will do OK but we expect consumers won't meet the lofty expectations on spending with the housing sector remaining soft and unemployment staying high through most of the year. Every year at the start the outlook is optimistic; lets wait and see what consumers do in Jan and Feb. Consumers will more likely save than spend, the demographic changes with 10K baby boomers a day turning 65, a trend that will continue for the next 10+ years and spending by the huge population of boomers won't meet the expectations currently out there.

The Republicans are now in control of the House and have more strength in the Senate. How the two political parties get along and confront health care, the federal debt limit, spending cuts in the next couple of months will set the tone for the next couple of years.

BofA resolved disputes with Freddie Mac and Fannie Mae by agreeing to pay more than $2.6B to settle claims that it sold loans based on faulty information. The fourth-quarter results would include a $2B impairment charge and a $3B provision. The bank faced $12.9B in unresolved put back demands on soured mortgages, with about half related to government-sponsored entities. The stock is rallying this morning in the settlement. 


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