Tuesday, 3/16/10 10:05 AM

Started again today with not much change in the rate markets. At 8:30 the 10 yr -2/32, mortgage prices -2/32 (.06 bp) and the DJIA index +13. 8:30 brought Feb housing starts and permits; starts were down 5.9%, Jan starts however were revised higher to 611K from 591K originally reported; most of the blame for the decline in starts is on bad weather and snow. Feb building permits were slightly better than expected, down 1.6% against estimates of -3.2%. There was no noticeable market reactions to the housing numbers. Also at 8:30 Feb import prices declined 0.3% while export prices fell 0.5%; yr/yr import prices are up 11.2% while export prices +3.1%. The annual increase in import prices is driven by oil prices.

Today will generally be quiet as it was yesterday. The FOMC meeting is underway and will conclude with the always interesting policy statement where the Fed lets markets interpret the short and at times confusing wording. The consensus is that the statement will be about unchanged from the four previous FOMC meetings. The possible exception may be the change in wording on how long the Fed will keep rates low. Former Fed Governor Laurence Meyers is predicting the Fed will not increase rates until mid-2011. We expect the Fed won't budge from ending the MBS purchases at the end of the month, but may toss a crumb that the door is still open if absolutely necessary. By the end of the month the Fed will have purchased $1.25T of MBSs. Until 2:15 markets will likely sit still with not much change. 

Short term rates are increasing as the Fed begins withdrawing the $1T stimulus; overnight Fed funds are now at highs not seen since last Sept and Libor rates are beginning to creep higher. The increase is a strong sign that traders are preparing for tighter monetary policy. Looking back; in the three months leading to the Fed's tightening moves back in 2004, the bellwether 10 yr note increased 0.75%. Traders and markets don't wait to see the whites of eyeballs, always moving in advance of signals clearly sent by the Fed. After a strong rally earlier in the quarter the markets are already losing momentum, bonds have lost 0.52% so far this month after increasing 0.4% in Feb and 1.58% in January.

Last Friday Feb retail sales jumped 0.3%, much better than 0.1% expected, and when auto and gasoline sales are extracted retail increased 0.8%. Most recent economic data has been better than expected; not much but enough to increase concerns the Fed is preparing to tighten. That said, the prep may take months or even a year. Although recent data has been better, job markets remain weak and the housing sector still has serious inventory issues. The Fed will wait until there is solid evidence consumers are back for real with new jobs increasing and the housing sector in better shape. In the background there are many that continue to believe the economy is headed for a double dip, if that were to develop interest rates will slide back and the pressure the Fed is feeling to tighten will lift. Bernanke is unlikely to tighten too early, fearing it would fuel an economic backslide.

After a soft opening, at 9:30 the 10 yr and mortgages found a little traction when the stock market opened flat. With the FOMC meeting today, expected generally quiet markets until the 2:15 statement. Bonds are offered with the FOMC on tap, and it is decided the world will help Greece. The lessened concern over Greece saw a return to riskier issues, while the looming FOMC is seen as a unknown, with rates on hold and minor tweaks to the statement.

PRICES @ 10:00 AM

10 yr note:                         99.16 +3/32 (.09 bp) 3.69% -1 BP

5 yr note:                           99.28 unch 2.40% unch

2 Yr note:                           99.27 unch unch 0.95% unch

30 yr bond:                        100.06 +9/32 (.28 bp) 4.61% -2 BP

Libor Rates:                        1 mo 0.235%; 3 mo 0.260%; 6 mo 0.401%; 1 yr 0.871%

30 yr FNMA 4.5 Apr:           @9:30 100.28 -1/32 (.03 bp) (unch frm 9:30 yesterday)

15 yr FNMA 4.0 Apr:           @9:30 101.27 unch (+4/32 (.12 bp) frm 9:30 yesterday)

30 yr GNMA 4.5 Apr:          @9:30 101.16 -1/32 (.03 bp) (+1/32 (.03 bp) frm 9:30 yesterday)

15 yr GNMA 4.0 Apr:          @9:30 102.20 unch (+4/32 (.12 bp) frm 9:30 yesterday)

Dollar/Yen:                        90.32 -0.04 yen

Dollar/Euro:                      $1.3718 +$0.0048

Gold Apr:                           $1123.90 +$18.50

Crude Oil Apr:                    $80.76 +$0.96

Goldman-Sachs

Commodity Index:             521.79 +5.38

DJIA:                                 10647.59 +5.44

NASDAQ:                           2364.97 +2.78

S&P 500:                           1153.05 +2.54