Quiet to start this morning with no change in the bond and mortgage markets, US stock indexes were slightly weaker at 8:30, the 10 unchanged and FNMA 3.5 30 yr coupon +5 bps from unchanged yesterday. Q4 employment cost index at 8:30expected up 0.6% was up 0.5%; yr/yr +2.2% from +2.3% in Q3.

In Europe the economy grew 1.8% yr/yr and up 0.5% from Q3, but the core remains below 1.0%. The consumer price index was up 1.8% y/y in January, faster than both expectations and December’s 1.1% pace. The euro-zone’s core CPI increased by 0.9% y/y in January, matching both estimates and December’s pace. Germany’s unemployment declined to 5.9% from 6.0%. In the UK consumer confidence increased to -5 from -7 in Dec. The better economic news in Europe will press the ECB on more QE and negative interest rates but Draghi is likely to say there is more to be done, even with consumer prices at their highest level since Feb 2013. We care because as Europe comes out of the dark ages it fortifies the Fed’s concerns that a rate increase is necessary. Yesterday Yellen’s favorite inflation reading, the personal consumption expenditures’ core is closing in on 2.0%, at 1.7% yr/yr. The next policy meeting for the ECB is on March 9th.

The BofJ didn’t change any monetary policies but did upgrade its outlook in 2017 to +1.5% from 1.3% previously. A weaker yen helping; its inflation forecast remains at +1.5% for 2017.

Case/Shiller 20 city home price index (NSA) increased 0.2% in Nov; yr/yr +5.3% slightly better than 5.0% expected and 5.1% in Oct. A lot made out of this report but as we have noted, we don’t pay it much attention unless one lives in one of the 20 cities; but it is a look at potential trends. The data is pretty stale but the Case-Shiller index has the advantage of comparing selling prices for the same homes, as opposed to other housing price indices that suffer from selection bias.

At 9:30 the DJIA started -77, NASDAQ -22, S&P -6. 10 yr note 2.48% -1 bp FNMA 3.5 30 yr coupon +8 bps from yesterday’s close and +8 bps from 9:30 yesterday. Stock indexes declined yesterday in a consolidation move after the wild rapid increase since mid-Dec. Not unexpected; we thought it should have begun sooner. Not a trend change and we expect stocks to continue higher but in the near term increased volatility as new buyers see this as a buying opportunity while professional investors are willing to hold pat.

At 9:45 this morning the Jan Chicago purchasing mgrs. index, expected at 55.2 from 54.6; as released the index declined to 50.3 a big miss. Tomorrow the national ISM manufacturing index will be released. This is the second month in a row the index has dropped.

At 10:00 Jan consumer confidence index from the Conference Board expected at 112.2 from 113.7 in Dec. The index dropped to 111.8; 113.7 was the best since 2001, the index today although a slight miss is still strong.

The FOMC meeting is underway; nothing until tomorrow afternoon at 2:00 pm.

President Trump is expected to name his choice for the Supreme Court today; likely it won’t go down well for Democrats and will set off weeks of debate before any confirmation vote occurs.

The bond and mortgage markets took a while to engage but the Chicago PM index and the softness in stocks finally moved to the bond and mortgage markets. At 9:30 MBS prices +8 bps, at 10:05 +23 bps. The 10 at 9:30 2.48%, at 10:05 2.45% -4 bps. Yesterday the key stock indexes fell but no movement into the bond markets, this morning at 10:00 DJIA down 119 and money is moving into treasuries.

PRICES @ 10:10 AM

10 yr note: +12/32 (37 bp) 2.45% -4 bp

5 yr note: +8/32 (25 bp) 1.90% -5 bp

2 Yr note: +1/32 (3 bp) 1.20% -1 bp

30 yr bond: +20/32 (62 bp) 3.04% -4 bp

Libor Rates: 1 mo 0.780%; 3 mo 1.034%; 6 mo 1.356%; 1 yr 1.724%

30 yr FNMA 3.5 Feb: @9:30 102.08 +8 bps (+8 bps from 9:30yesterday)

15 yr FNMA 3.0: @9:30 102.48 -2 bp (unch from 9:30 yesterday)

30 yr GNMA 3.5: @9:30 103.45 +6 bp (+6 bps from 9:30 yesterday)

Dollar/Yen: 112.46 -1.32 yen

Dollar/Euro: $1.0790 +$0.0096

Dollar Index: 99.67 -0.70

Gold: $1215.90 +$19.90 (very weak dollar this morning)

Crude Oil: $53.19 +$0.61 (weak dollar)

DJIA: 19,849.59 -121.54

NASDAQ: 5585.03 -28.68

S&P 500: 2270.94 -9.59