Thursday, 7/29/10 4:10 pm

After the very strong 5 yr auction yesterday most were expecting another strong bid for today's $29B 7 yr note. That wasn't the case however, the yield hit about 2 basis points higher than trading in the when-issued market this morning at 2.394%, the cover was 2.78 with indirect bidders taking 42.3% of it while the direct bidders were a non-factor taking just 9.0%. The market had been highly optimistic heading into the auction with trade looking for 2.375% right on the "when issued" mark. The previous, larger, $30B 7 yr auction saw a record 3.01 bid-to-cover ratio and an indirect bidder participation rate of 51% while seeing an about average 9.8% in direct bids. The 10-auction averages are 2.81 on the cover, 52.3% indirect bidder take and 9.7% for direct bids.

This morning's weekly jobless claims, spun to appear good, was lousy again; 450K a week filing for new unemployment with those who’ve used up traditional benefits and are now collecting emergency and extended payments decreased by about 269,000 to 3.66 million. President Obama on July 22 signed into law a measure restoring unemployment benefits that were cut off. The bill provides retroactive aid to those whose checks were cut off when benefits expired June 2, while extending through November a program offering up to 99 weeks of assistance. Almost two years of assistance, 3.66 mil on extended benefits; these are not statistics that support the view of an expanding economy.

St. Louis Fed Pres James Bullard shook the tree this morning, releasing a paper that warns of a Japanese style deflation. “‘The U.S. is closer to a Japanese-style outcome today than at any time in recent history.” ....“A better policy response to a negative shock is to expand the quantitative easing program through the purchase of Treasury securities.” Bullard and other Fed officials including Bernanke are increasingly worried the economy may be stalling and headed lower. No improvement in employment and no housing market improvement for over two years now. “Under current policy in the U.S., the reaction to a negative shock is perceived to be a promise to stay low for longer, which may be counterproductive because it may encourage a permanent, low nominal interest rate outcome,” Bullard wrote in his paper released today. In related news today Kellogg reported it has no pricing power when it reported earnings, imp[lying what Bullard was saying, that with no pricing power a protracted period of low interest rates and increasing potential of deflation could keep the US economy down for many years similar to the plight of Japan. Not a pretty picture friends.

Top-flight loan officers in search of job security have been fleeing the confines of nonbank lenders for the megabanks, in search of job security and a future. But it now appears some of these LOs are headed back to the nonbanks because the big boys take much too long to close a loan. What's at stake here, quite simply, is loan commissions. Not only are there reports of firms like Bank of America and Wells Fargo tightening the hatch on how much they pay in commissions, but because these lenders take so long to close a mortgage, some Realtors won't give certain branches referrals anymore. (Nat'l Mtg News)

Tomorrow is loaded with important data; at 8:30 the advance Q2 GDP (+2.5%), Q2 employment cost index (+0.4%). At 9:45 July Chicago purchasing mgrs index (56.0 frm 59.1), at 9:55 the U. of Michigan consumer sentiment index (67.0 frm 66.5). Each data point is significant and has the potential of moving markets pending how the data hits. Q2 GDP is optimistically expected to increase but less than 2.7% in Q1, likely however GDP won't reach that expected level.

PRICES @ 4:00 PM

10 yr note:                       104.10 +1/32 2.99% unch

5 yr note:                         100.11 1.67% -13 BP frm yesterday's auction

2 Yr note:                        100.02 +2/32 0.59% -2 BP

30 yr bond:                      105.04 -6/32 4.08% +1 BP

Libor Rates:                     1 mo 0.311%; 3 mo 0.465%; 6 mo 0.677%; 1 yr 1.050%

30 yr FNMA 4.0 Aug:       102.08 +7/32 (.22 bp) (+8/32 (.25 bp) frm 9:30)

15 yr FNMA 3.5 Aug:       102.23 +7/32 (.22 bp) (+8/32 (.25 bp) frm 9:30)

30 yr GNMA 4.0 Aug:      102.30 +8/32 (.25 bp) (+9/32 (.28 bp) frm 9:30)

15 yr GNMA 3.5 Aug:      103.05 +5/32 (.15 bp) (+7/32 (.22 bp) frm 9:30)

Dollar/Yen:                     86.85 -0.49 yen

Dollar/Euro:                   $1.3086 +$0.0100

Gold Aug:                       $1167.80 +$7.40

Crude Oil Sept:               $78.25 +$1.26

Goldman-Sachs

Commodity Index:         518.32 +8.33

DJIA:                              10,467.16 -30.72

NASDAQ:                        2251.69 -12.87

S&P 500:                        1101.53 -4.60