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Mortgage markets took a real hit yesterday on uncertainty over what politicians are doing to help underwater mortgagors. The government is adding another plan to lend money to those that are underwater but still are current. Treasury markets had become technically overbought after the sizeable decline in rates over the previous few days; yesterday the 10 yr rate increased 6 basis points on profit-taking as traders worked on overbought momentum oscillators. This morning the bond market started better with weaker equity market outlook, mortgage prices a little better but still look vulnerable in the short run but the longer look remains positive for mortgage rates.

At 8:30 two data points; July retail sales were up 0.4% about in line with estimates, ex auto sales up 0.2%; May retail sales originally reported -0.5% was revised to -0.3%. July consumer price index hit at +0.3% overall slightly higher than 0.2% estimates; the core (ex food and energy) was right on, +0.1%. Yr/yr overall consumer prices up 1.2%, ex food and energy +0.9%; both ratifying that inflation is not a factor to be concerned with. There was little reaction to the two reports in either stock indexes or the bond markets.

At 9:00 this morning the DJIA index was -3, the 10 yr note +9/32 at 2.71% -4 bp while mortgage prices were up 5/32 (.15 bp). At 9:30 the DJIA opened -20, the 10 yr +7/32 at 2.72% -3 bp and mortgage prices +4/32 (.12 bp).

The U. of Michigan/Reuters consumer sentiment index at 9:55, expected at 69.0 frm 67.8, came in at 69.6. The 12 month outlook index at 69 frm 66. A little better but the index is at its lowest readings in a year. A little bounce on the initial reaction in the equity markets and mortgage prices slipped slightly.

At 10:00 June business inventories, expected to be +0.2%, were up 0.3%; sales were down 0.6% increasing the inventory to sales ratio to 1.26 months from 1.25 month. No noticeable reaction to the report.

Rate markets are holding but with not much improvement from the selling yesterday. The mortgage markets were very soft yesterday and so far this morning don't show much strength. The reminder of the day the bond and mortgage markets will react to any significant advances in equity markets. The DJIA is trying to improves, hovering back and forth around unchanged.

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