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Treasuries and mortgage prices opened better early this morning but by 9:00 the 10 yr note drifted back to unchanged and mortgages also unchanged after a brief move to +4/32 (.12 bp) frm Friday's close. Stock indexes have been slightly better in early trade and prior to the 9:30 open after a strong day Friday that drove treasury rates higher. At 9:30 the DJIA opened +16, the 10 yr note unchanged and mortgages +2/32 (.06 bp).

At 10:00 this morning June new home sales, expected to have increased 4.25% frm May's huge decline. The headline looks good, the guts however are not that good. As reported sales in June were up 23.5% from May, BUT May sales originally reported at +300K units annualized, were revised to just 267K so the percentage increase is mis-leading. In June based on the sales there is a 7.6 month supply a decline from the 9.6 month supply in May. The headline traders in equities took the report as good news although we don't see it that way; the initial reaction took the DJIA from +5 to +62 in three minutes while rates remained unchanged from levels prior to the sales data.

This week Treasury will borrow a total of $104B, $4B less than a month ago, in 2 yr, 5 yr and 7 yr note offerings, the demand for the debt is expected to be good but we have noted some minor anomalies in the demand for US debt in recent auctions. That said, traders still expect the auctions will meet with decent demand; if however the demand ever weakens the rate markets will spike higher quickly.

This Week's Economic Calendar:
Tuesday;
9:00 am Case/Shiller Home price index (+4.0% in May)
10:00 am July consumer confidence index (51.0 frm 52.9 in June)
1:00 pm $38B 2 yr note auction
Wednesday;
7:00 am Weekly MBA mortgage applications data
8:30 am June durable goods orders (+1.0%, ex transportation +0.5%
1:00 pm $37B 5 yr note auction
2:00 pm Fed Beige Book economic report
Thursday;
8:30 am weekly jobless claims (-4K to 460K; continuing claims 4.55 mil frm 4.49 mil)
1:00 $29B 7 yr note auction
Friday;
8:30 am Q2 advance GDP (+2.5% frm +2.7% in Q1)
8:30 Q2 employment cost index (+0.4%)
9:45 am July Chicago Purchasing Mgrs index (56.0 frm 59.1 in June)
9:55 am U. of Michigan consumer sentiment index (67.0 frm 66.5)

Those widely anticipated bank stress tests in Europe didn't generate much direct market reaction. The view that the tests may not have been stringent enough has surprised many; found banks need to raise 3.5 billion euros ($4.5B) of capital, about a tenth of the lowest analyst estimate, leaving doubts about whether the tests were tough enough. Before the results were published, analysts estimated the banks would have to raise 30 billion euros. Goldman Sachs Group Inc. predicted they would need 38 billion euros and Barclays Capital said they would require as much as 85 billion euros. Tests carried out in the U.S. last year found that 10 lenders, including Bank of America Corp. and Citigroup Inc., needed $74.6B.

Technically, the bellwether 10 yr note and mortgage markets are working at near term key levels. Both the FNMA 30 yr coupon and the 10 yr treasury note are testing their respective 20 day averages. Mortgages have not closed below their 20 day average since April 15th, while the 10 yr note did early in July for one day before rebounding. I have used the 20 day average for many years as a guide to near term outlook; generally reliable.

My thanks to Ann Magelinski for taking over last week while I was off.

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