Market Snapshot 10/27/2011

The summit in Brussels yesterday is being considered a success this morning; US stock indexes rallying and US interest rates increasing on news that Europe's leaders have actually come with a plan that is supposed to isolate Greece from defaulting and taking some pressure off for the moment.  Last-ditch talks with bank representatives led to the debt-relief accord,  

bondholders will take 50% losses on Greek debt and boosted the firepower of the rescue fund. Measures include recapitalization of European banks, a potentially bigger role for the International Monetary Fund, a commitment from Italy to do more to reduce its debt and a signal from leaders that the European Central Bank will maintain bond purchases in the secondary market. The rescue fund (EFSF) is to be increased to 1 trillion euros ($1.4T). There are a lot of details yet to be worked out so while this is a breakthrough the problems are still not completely out of the woods; expect Europe to continue to drive global markets as more details must be resolved. It helped yesterday when China said it may be interested in buying some of the debt through the EFSF.

The reaction to European developments this morning is a huge rally in Europe's equity markets and in the US; at 9:00 this morning the DJIA was trading up 246 points, the 10 yr note testing important technical support level at 2.30% and mortgage prices at 9:00 -14/32 (.44 bp).

This morning weekly jobless claims were about as expected, down 2K to 402K, last week claims were revised to 404K frm 403K. Continuing claims were 3.645 mil down from 3.741 mil last week. Q3 GDP expected at +2.2% to +2.5% was on target at +2.5% after Q1 growth grew at 1.3%; final sales in Q3 were up 3.6%. The combination of Europe and Q3 GDP drove the DJIA to open +145 points, NASDAQ +72 and the S&P +23; by 9:35 the DJIA traded up 260 points.  

Treasury rates increasing this morning driving mortgage prices lower and rates up. The 10 yr note is sitting right on what we consider key support at 2.30%, it hasn't been above 2.30% since mid-August. Strong GDP, strong auto sales, a slightly better new home sales in Sept and a better outlook in Europe are increasing optimism momentarily. The Europe relief rally began yesterday and is running hot again in early activity. Investors sighing relief but Europe still has a huge problem with Italy and Spain; Italy's debt is well over 1T euros more than the EFSF has in the present fund.

At 10:00 NAR reported August pending home sales were expected to be down 1.0%, sales fell 4.6%; yr/yr up 6.4%. Contracts signed not yet closed, the third month in a row pending sales have declined from the previous month. There has been no immediate reaction to the report.

At 1:00 Treasury will auction $29B of 7 yr notes; yesterday the 5 yr went off well but y the end of the day and this morning those notes are already underwater.

Today is critical for the bond market; the 10 yr note is at 2.28% at 10:00, it has tested 2.30% where we have support that must hold, a move above 2.30% would add additional technical weakness for the bond and mortgage markets.