Job Loss Accelerates in June

June non-farm payrolls fell by 467k, much worse than the median Bloomberg forecasted loss of 365k jobs, and a sharp decline from May when a revised 322k jobs were lost. Since the recession officially began in December 2007, 6.5 million jobs have now disappeared. Unemployment climbed from 9.4% to 9.5% in June, the highest rate in 26 years. Although the actual unemployment rate was slightly less than the median forecast, it simply reflected a larger number of discouraged workers abandoning the job search.

Some of the lesser labor data was also disappointing as employers cut both salaries and hours as an alternative to cutting even more workers - the average work week dropped to 33 hours, a new record low, while hourly earnings were unchanged during the month.

Despite optimism embedded in the June ISM survey that was released yesterday, factory layoffs continued on a large scale with another 136k manufacturing workers receiving pink slips in June following factory job loss of 156k in May. The ailing auto sector contributed more than 26k lost jobs to the growing stack. Construction payrolls fell by 79k in June, after recording 48k losses in May. Surprisingly, even the government sector shed jobs in June with 52k government employees adding to the available labor pool.

Speaking of the growing pool of available workers, a Citigroup fixed income trader wrote in this morning's Citigroup commentary that the labor pool had recently topped 20 million, and he didn't expect to see the Fed hike rates until that number dropped below 14 million ...which he thought could take years. Similarly, the Merrill Lynch economics team now predicts that the Fed will raise interest rates to 0.75%, but not until the end of 2011.

Auto Sales are Disappointing

June auto sales fell from a 9.9 million annual pace in May to 9.7 in June. Although this is up from an exceedingly weak 9.1 million unit pace in February, it's down from 13.6 million a year ago and a high of 20.7 million in July 2005. On the bright side, car and truck sales are expected to pick up later in the year as the "cash for clunkers" program kicks into gear. It's also worth noting that the average life of vehicles on U.S. roads is now at an all-time high of 9.4 years, suggesting that many will have to be replaced out of shear necessity.

AAA reported that the average price for a gallon of regular gasoline dropped to $2.63 this week, and predicted that summer gas prices peaked 10 days ago at $2.69.

Mortgage rates continue to inch slowly downward. After reaching a 2009 high of 5.57% in early June, the average 30-year mortgage rate has declined three straight weeks to 5.34%. Today's data should help ratchet rates lower still, although lending rates have a tendency to fall at a much slower rate than they rise.

The stock markets are getting battered as it now appears hope for significant economic recovery in the near-term may have been premature.

Market Indications as of 9:50 a.m. Central Time
DOW - down 169 to 8,335
NASDAQ - down 44 to 1,801
S&P 500 - down 20 to 899
1-Yr T-note up 2/32 to 0.47%
2-Yr T-note up 3/32 to 0.98%
5-Yr T-note up 11/32 to 2.43%
10-Yr T-note up 10/32 to 3.50%
30-Yr T-bond up 2/32 to 4.32%

Purchasing Managers Signal Improvement

The Institute for Supply Management (ISM) survey of U.S. purchasing managers continued to show improvement in the factory sector. The manufacturing index, a composite measure of factory health, rose from 42.8 to 44.8 in June, nearly matching expectations. Any number below 50 still indicates contraction, but the June number is a vast improvement from the 32.9 reading seven months earlier, which had been a 28-year low. Earlier this week, regional purchasing managers reports had looked quite strong hinted at a respectable national ISM number. The Chicago Purchasing Managers index rose from 34.9 to 40.1 in June, while Milwaukee increased from 43 to 50 and Cincinnati from 38.5 to 42.1. Like many economic numbers that have emerged during the quarter, the purchasing managers surveys, both national and regional, are still very weak. Conditions are slowly improving, but there is little to suggest robust growth in future quarters or that a surge in demand will ignite inflationary pressures.

This point was hammered home yesterday by San Francisco Fed President Janet Yellen who was quoted as saying that leaving the overnight funds rate at zero for the next several years would not be "outside the realm of possibility". She went on to say that "we have a very serious recession" and "...if we were not already at zero, we'd be lowering the funds rate."

Also released this morning were the May pending home sales. This data series has gained attention in recent months as analysts look for additional clues on the condition of the housing sector. Pending Home Sales, which represents signed contracts to purchase existing homes rose by 0.1% in May. The fourth consecutive increase, although only slightly above expectations, drove year-over-year sales from a 3.3% increase to 4.6%. Although this is good news, home affordability has dropped in the past month as mortgage rates climb, suggesting that further improvement in housing might be a challenge - the Mortgage Bankers Association mortgage applications index fell by 18.9% in the week ending June 26 and the National Association of Realtors announced earlier this week that its affordability index fell from 178.8 in April to 171.6 in May.

Interesting fact - In 1950, the average home size was 983 square feet; in 1970, 1400 square feet; and in 2006, 2,495 square feet. I can't find reliable 2007 data, but in 2008, the average home size fell for the first time in 35 years. Some experts have predicted that a trend for the future will be smaller, more energy efficient dwellings located closer to urban centers.

And In Other Financial Market News...

Consumer confidence unexpectedly dropped from 54.8 to 49.3 in June. Experts had predicted a slight rise. Both the present situation index (-4.9 points) and the expectations index (-6.0 points) fell during the month. The most likely contributor to waning confidence seems to be continued deterioration of the labor markets. The ADP employment report (released this morning) showed that 473k jobs disappeared in June, well above the 394k forecasted loss. The June labor market report is released tomorrow. The median forecast is for a loss of 365k more jobs and a rise in the unemployment from 9.4% to 9.6%. Sagging consumer confidence is already apparent in the weekly retail sales numbers. Redbook reported that year-over-year same store sales slumped by 4.3% in the last week of June. The fourth straight decline and according to Merrill Lynch, "near the weakest levels on record".

The U.S. automakers aren't the only ones feeling the crunch of recession. Japan's largest automaker expects to lose $5.7 billion for the year ending in March on a 14% sales decline. Toyota's credit rating was cut from AA to A- by Fitch yesterday reflecting lower sales and a second consecutive year of losses.

The DOW closed the quarter up 11%, but is still down 3.8% for the year. So far this morning, the DOW is up over 100 points.

The 'TED spread", a closely watched credit measure that reflects the difference between the rate banks pay to borrow amongst themselves (3-month LIBOR futures) and the rate that the government pays to borrow (3-month Treasury futures) fell to 41 basis points at the end of the quarter. This is down from 464 basis points in October when the financial markets were in full panic mode. The significance of this measure is vast improvement in financial market confidence.

Market Indications as of 9:45 a.m. Central Time
DOW - up 121 to 8,568
NASDAQ - up 25 to 1,860
S&P 500 - up 12 to 927
1-Yr T-bill down 1/32 to 0.52%
2-Yr T-note down 2/32 to 1.08%
5-Yr T-note down 2/32 to 2.57%
10-Yr T-note down 14/32 to 3.59%
30-Yr T-bond down 26/32 to 4.38%

Markets Stabilize Along with Data

Despite a flood of data in the last week, reaction from the financial markets has been fairly muted. In general most of the economic data released in the last week, while still poor by historical standards, has shown tentative signs of stabilizing. The FOMC reinforced the trend by reiterating its stance on monetary policy and maintaining the current fed funds rate in a range of 0% to 0.25%. First quarter GDP was revised higher, but still reflected a decline of 5.5%. In a sign that the pace of job losses continues at a fairly high level, initial jobless claims climbed to 627k. Personal income did manage a surprising gain of 1.4% in May, but that figure was boosted by tax cuts and social security payments from the government's stimulus plan. Excluding those items, wages and salaries decreased 0.1% in May. The Dallas Federal Reserve's manufacturing activity index improved to -20.4% in June from May's -21.5%. While this is still firmly in negative territory, it has improved every month this year and is well off the -61% low reached last November. The Chicago Purchasing Manager's Index climbed from 34.9 in May to 39.9 in June. With 50 as the break-even mark, this is another index that remains in negative territory, but has shown some improvement recently.

Financial markets seem to have stabilized. Last week's massive auctions of new government debt were well received and that combined with a meager 0.1% reading on the PCE Deflator (an inflation index used in GDP data calculations) to push bond yields lower. The two-year T-Note, which reached a yield of 1.40% on June 8th has now fallen back to 1.11% and has traded in a fairly narrow range for the last week. The yield on the 10-year T-Note, which closed at 3.95% on June 10th, has now declined to 3.49%. Major stock indices have not moved much in the last week.

Home Prices Continue to Fall While Foreclosures Rise

The S&P/Case-Shiller index of home prices in 20 major U.S. cities fell for the 33rd consecutive month in April. Since reaching a peak of 206.52 in July 2006 the index has fallen every month to 139.18 in April. This index is down 18.1% from a year ago and a whopping 33% from the 2006 peak. Nevertheless, in percentage terms April's decline was less than March's 18.7% or January's 19%, indicating that perhaps the pace of price declines is beginning to slow. In fact, eight of the 20 cities reported an increase in prices from March to April with Dallas leading the charge on a 1.7% gain.

Falling home values and rising unemployment continue to have a pronounced affect on mortgage delinquencies. The problems with sub-prime loans were an early harbinger of the pain to come in the prime market. Approximately two-thirds of all home loans are so called prime mortgages, documented loans made to well qualified borrowers, complete with down payments and income verification. Yet even this market is suffering mightily in the current economy. According to a report from the Office of Thrift Supervision and the Comptroller of the Currency, serious delinquencies on prime loans rose from 250,986 a year ago to 661,914 in the first quarter. The report said that 2.9% of all prime mortgages were 60 days or more past due, compared to 1.1% a year ago. In another troubling sign, the report also said that of those mortgages which were modified during the first quarter of 2008 to help struggling borrowers stay in their homes, 63% were 30-days or more past due.

Market Indications as of 11:55 a.m. Central Time
DOW - down 107 to 8,422
NASDAQ - down 14 to 1,830
S&P 500 - down 11 to 916
1-Yr T-Bill down 2bps to 0.47%
2-Yr T-note down 1/32 to 1.11%
3-Yr T-note down 0/32 to 1.60%
5-Yr T-note down 1/32 to 2.53%
10-Yr T-note down 2/32 to 3.49%
30-Yr T-bond down 1/32 to 4.28%

FOMC Meeting on Tap for this Week

Fed officials will meet on Tuesday and Wednesday to discuss economic conditions and just how much continued stimulus is necessary going forward. In recent weeks, long-term interest rates have been rising to reflect some combination of optimism for recovery and fear of inflation. Inflation fears have subsided somewhat after the decidedly benign, or even deflationary PPI and CPI numbers announced last week. Still, with scattered signs of recovery emerging, all ears are on the Fed to determine whether they will continue to support interest rates. Any shift in the official statement released on Wednesday that suggests the Fed will keep its powder dry could result in a surge in long-term rates. The FOMC is not expected to raise short-term rates until sometime in 2010.

Other News of Interest

Business Week recently reported that while household net worth has plunged more than $13.9 trillion in the past two years, household debt is being paid down in unprecedented numbers - since the third quarter of 2008, households have reduced their debt by more than $420 billion. For the first time ever, households paid off more debt than they took on for two quarters in a row. This deleveraging is good for household balance sheets but bad for economic growth. So, the government will do what it can to encourage spending.

The billion dollar "Cash for Clunkers" program, signed into law last week, will provide cash vouchers of up to $4,500 to encourage drivers to trade poor mileage vehicles for more fuel efficient cars and trucks. To be eligible for a voucher, the clunker must have a fuel efficiency rating of 18 miles or less per gallon and be in drivable condition. Buyers would receive $3,500 for an improvement of just four miles per gallon and the maximum $4,500 amount if the replacement vehicle gets an extra 10 MPG or better. The program is expected to help approximately 250,000 buyers who own old cars that are worth no more than the vouchers themselves. Since only new cars may be bought, the program is expected to give a short term boost to the auto sector. It's unclear what will happen to all those the trade-ins.

The Labor Department reported unemployment rose in 48 out of 50 states last month. Michigan, a state that could benefit greatly from the clunker program, had the highest rate at 14.1%, followed by Oregon at 12.4%. Rhode Island and South Carolina were close behind at 12.1%. California's unemployment rate reached a record high of 11.5% in May.

The Wall Street Journal reported in the weekend edition that the California housing market is finally showing signs of recovery. Certain areas in the state have experienced significant rebounds in recent months. Santa Barbara County in particular seems to be springing back to life. By last week, the number of pending home sales had risen to 3.882, nearly double the rate from a year earlier. Affordability has been the key. The average home price had fallen by 48% from $805,000 in August 2007 to $420,000 in January 2009, allowing 50% of Santa Clara residents, based on household income, to afford a home. This percentage is up from 18% two years ago. The fact that residents couldn't afford homes two years ago didn't seem to stop them from buying.

According to Business Week, the Japanese government is targeting stimulus to parents in efforts to goose the birth rate in order to counterbalance an aging population - 26% of the Japanese will be 65 years old or older by 2015. A new plan approved two weeks ago will provide up to $37 billion in aid to parents with new born children and new daycare centers.

Last week, 10 U.S. financial firms, including JP Morgan, Morgan Stanley and Goldman paid back $68 billion in TARP money last week to escape severe regulatory restrictions imposed on TARP recipients. This sounds like a good thing.

Merrill Lynch reported this morning that gasoline prices have risen for 51 consecutive days to a national average of $2.69 per gallon, an increase of $1.07 since the year began. This magnitude of increase would pull $140 billon out of consumer pockets annually. This will significantly hamper recovery. Hopefully, crude oil had peaked a week ago at just under $73 per barrel. Today, it fell below $67.

The DOW closed down 200 today, the fourth straight day of decline. The reason seems to be rooted in the notion that the equity markets had gotten ahead of themselves.

The bond markets have rallied as most of the economic news is still pretty bleak. Ironically, the bond market rally, which pushed yields lower, is conducive to economic growth.

Market Indications as of 3:59 p.m. Central Time
DOW - down 200 to 8,339
NASDAQ - down 61 to 1,766
S&P 500 - up 0.5 to 889
1-Yr T-bill up 2/32 to 0.46%
2-Yr T-note up 4/32 to 1.13%
5-Yr T-note up 15/32 to 2.70%
10-Yr T-note up 25/32 to 3.68%
30-Yr T-bond up 33/32 to 4.44%

From June 1 through June 9, 2009, Bloomberg News surveyed 61 top economists for their most recent opinions on the U.S. economy and interest rates. The following are summaries of their responses:

The Economic Forecast

Unemployment Rate - The median forecast for Q2 2009 unemployment was 9.30%. The median forecast for the next three quarters are 9.70%, 10.00% and 9.90%.

Prior to the announcement of the non-farm payrolls report, jobs were forecast to decline by 520K in May. When announced on June 5th, the actual drop amounted to 345K, nearly half that of the previous six months' average losses of 643K. Furthermore, nearly 100K losses were added back to previous months in revisions. The unemployment rate, however, continued to rise, increasing from 8.9% to 9.4%. Manufacturing remained the hardest hit segment, with 156K jobs lost in May. That number may actually get worse before it gets better, given GM's bankruptcy and subsequent closure of more factories. According to the Bureau of Labor Statistics, employment in motor vehicles and parts has fallen by about 50 percent since its most recent peak in February 2000.

Despite predictions the economy will begin to grow in Q3, the unemployment rate is still expected to reach double digits before year-end. Typically, employers are reluctant to begin hiring again until they are certain business is improving, thus a lag between recovery and lower unemployment rates exist. That said, businesses do seem to have slowed the rate at which layoffs are occurring, as seen in the 24K fewer claims for first time unemployment benefits, as of last week. Unfortunately, the number of continuing claims rose by 59K to 6.82 million, suggesting that businesses are still waiting for more concrete evidence of a sustainable recovery before putting out the help wanted signs.

Real GDP (annualized economic growth) - The median GDP growth forecast for Q2 2009 is -2.00%. The median forecast for the next three quarters are +0.50%, +2.00% and +2.10%.

Changes in business inventory levels are an excellent harbinger of future expansion or contraction. Faced with the dramatic and widespread drawback in consumption, businesses reduced inventories for an eighth straight month in April by 1.1%, versus a reduction of 1.3% in March, as reported by the Commerce Department last week. With the economy beginning to show signs of recovery, inventory levels should begin to level out, and should be positioned well for a recovery. The inventory-to-sales ratio, a measure of the number of months it would take a businesses to deplete its current inventory, fell to 1.31 in April, down from 1.32 in March.

Inventory liquidations weighed dramatically on GDP in the previous quarter, reducing growth by a factor of 2.34%, nearly half of the 5.7% contraction in Q1. With inventory levels having fallen yet again, it stands to reason Q2 GDP will be adversely effected. According to the survey, Q2 GDP will remain in negative territory, but is forecast to rebound positively in the latter half of the year.

Consumer Prices - The median annualized consumer inflation forecast for Q2 2009 was -1.10%. The median forecast for the next three quarters are -1.70%, +0.95% and +1.50%

The Producer Price Index (PPI) fell by 5.00% year-over-year in May, while the core PPI fell 0.1% month over month; the first monthly decrease since October 2006. The Consumer Price Index (CPI) for May indicated further evidence that deflation, not inflation, still poses the greatest macro-economic risk. For the last 12 months, CPI declined 1.3%, the largest drop since April 1950. The monthly change was a mere increase of 0.1%, still lower than the 0.3% expectation of this survey last month.

Richard Fisher, president of the Federal Reserve Bank of Dallas, this week dismissed rumblings that the central bank’s efforts to prop up the economy will cause inflation to soar. Mr. Fisher, a self-described inflation hawk, said, "it’s inappropriate to be overly concerned on price pressures now because of the amount of “slack” in the economy." Historically, as signs that slack in a recessionary economy diminish, firms typically begin to ramp-up inventories, eliminating any deflationary effects, but we've not yet seen any indication of this occurring.

Many economists believe the capacity utilization rate is a useful indicator of inflationary pressures. The capacity utilization rate measures the operating rate of the nation’s industrial capacity. The rate of capacity utilization declined in May to a record low 68.3%, 12.6% below its average over the last 36 years. Prior to the current recession, the low over the history of this series, which began in 1967, was 70.9% in December 1982.

The Interest Rate Forecast

Overnight Fed Funds - The MEDIAN fed funds forecast for Q2 2009 is 0.22%. The MEDIAN forecast for the next four quarters are 0.25%, 0.25%, 0.25% and 0.25%. The current fed funds rate is a range between 0.00% and 0.25%.

Fed officials meet next Wednesday to discuss the future of interest rates. It is widely expected the policy makers, in light of record low manufacturing output and rising unemployment, will hold firm on rates for the time being. There is speculation that the policy statement will discuss these economic factors directly in order to emphasize the lid they place on inflation.

“The idea of tightening from where we are...I don’t see it in the immediate future,” Mr. Fisher said of raising rates this week in a television interview.

Two-year Treasury-note - The average 2-year yield forecast for Q2 2009 is 1.10% The average yield forecast for the next four quarters are 1.14%, 1.31%, 1.52% and 1.79%. The current 2-year Treasury yield is 1.14%.

10-year Treasury-note - The average forecast for Q2 2009 is 3.52%. The average forecast for the next four quarters are 3.52%, 3.63%, 3.79% and 3.98%. The current 10-year yield is 3.60%.

Market Indications as of 9:35 a.m. Central Time
DOW - up 75.13 to 8,572
NASDAQ - up 0.18 to 1,808
S&P 500 - up 8.50 to 914
3-Mo T-Bill at 0.175%
1-Yr T-Bill at 0.488%
2-Yr T-note down 2/32 to 1.21%
5-Yr T-note down 13/32 to 2.77%
10-Yr T-note down 20/32 to 3.77%
30-Yr T-bond down 29/32 to 4.57%

Positive Signs for the Housing Market

Housing starts surged 17% in May to an annual rate of 532,000 units, up from 454,000 in April. Multi-family construction starts rose by nearly 62% in May while single family starts rose by 7.5%. These numbers are solid and quite encouraging, but overall starts are still down 45% from 12 months ago and are down almost 77% from the peak in January 2006 when the annualized pace reached a whopping 2.3 million. Building permits, a indication of future starts increased by 4% in May, suggesting that the good news won't immediately fizzle.

Tax incentives to first-time home buyers, as well as near record low interest rates and deeply discounted home prices have attracted some new buyers and given builders hope. New construction is an essential ingredient to economic growth, but the question going forward will be whether this bounce in starts and permits can be sustained with mortgage lending rates already up by 75 bps in June.

Inflation Fears Eased by PPI Report

One of the biggest investor concerns in the current market is that once economic growth begins, inflation will quickly follow. Few experts seem to share this view, but that hasn't slowed a rise in commodities prices and an increase in the general level of interest rates. This morning's release of the May producer price index (PPI) should ease inflationary fears somewhat as core PPI actually fell for the first time since October 2006. The 0.1% month-over-month core drop would been a bigger 0.2% decline if a 0.7% gain in tobacco prices were factored out. Although overall PPI increase by 0.2% on a month-over-month basis, on a year-over-year basis, overall PPI was down by a full 5%, the biggest drop in five decades.

In other news, industrial production fell by a larger than expected 1.1% in May, further deceleration from the 0.5% decline in April. It was the 7th straight drop, and the 16th drop in the last 17 months. This suggests that the factory sector is weakening further. Predictably, the factory capacity utilization rate fell for the 8th consecutive month, tumbling all the way to 68.3%, another all-time record low.

Keep in mind that capacity utilization represents slack in the manufacturing sector in much the same way that the unemployment rate represents slack in the labor market. Even when the economy turns around, the slack has to be worked off before expansion and new hiring can begin. With this in mind, fears of inflation appear to be overblown.

Cessna reported yesterday that it would be laying off an additional 1,300 workers as demand for corporate jets remains very weak. The corporate jet market would seem to be a likely casualty of the new era of corporate responsibility.

The Wall Street Journal reported yesterday that the U.S. Post Office is considering cost cutting measures that could include the end of Saturday mail delivery.

Capital One Financial reported yesterday that it wrote off 9.4% of its credit card loans on an annualized basis in May, a sharp increase from 8.56% in April. When unemployed workers prioritize their expense payments, revolving credit typically falls below food, housing and transportation. Unfortunately, the increasing default rates suggest further tightening of credit standards, an event that would have been appropriate several years ago, but certainly won't help spending in the midst of recession.

Market Indications as of 10:50 a.m. Central Time
DOW - down 17 to 8,594
NASDAQ - up 6 to 1,822
S&P 500 - up 2 to 921
1-Yr T-bill up 0/32 to 0.46%
2-Yr T-note up 1/32 to 1.20%
5-Yr T-note up 1/32 to 2.71%
10-Yr T-note up 2/32 to 3.70%
30-Yr T-bond up 12/32 to 4.54%

Retail Sales Advance

Perhaps it was, as this morning's Mizuho market commentary wrote, a "dead cat bounce" after two months of negative sales growth, or maybe the 0.5% gain in May retail sales was another "green shoot" signaling future growth on the horizon. Regardless, it was a positive number that was well above the 0.2% median Bloomberg forecast ...and if the U.S. economy is going to grow it's exactly the type of number we need to see. Having said that, most of the May increases were concentrated around necessity items such as food, clothing and health items, while weakness continued in more discretionary items like electronics, sporting goods and furniture. If the recession technically ends (or maybe pauses) by the third quarter of 2009, there is still very little to indicate robust growth lies ahead.

Yesterday, the Fed released its Beige Book, a detailed examination of economic conditions within the 12 Fed districts used in preparation for discussion by Fed officials. The report prepared for the June 23-24 FOMC meeting stated that "labor market conditions continue to be weak across the country" and "credit conditions remain restrictive and have tightened further" while "prices at all stages of production were generally flat or falling". The report went on to say that manufacturing activity declined and commercial vacancy rates rose in many parts of the country while developers continue to have trouble finding project funding. All in all, a very weak report.

An indication of the health of California recently came from the California State Controller speaking on the budget condition of his state - "without immediate solutions from the governor and legislature, we are less than 50 days away from a meltdown of state government" - hardly the type of situation that suggests an economic turnaround is drawing near.

This morning, initial jobless claims fell by 24k to 601k for the week ending June 6. Although the pace of layoffs seems to be slowing, the jobs themselves are still disappearing. Continuing claims (the total number receiving unemployment benefits), rose for the 19th consecutive week to a record 6.82 million. Note that the prior week, which had broken the streak, was subsequently revised upward thereby keeping the dubious streak intact.

Earlier this week, the auto parts companies asked the Obama administration for $8 to $10 billion in loans. Although this sounds absurd, according to a Chicago Fed study, auto parts companies account for 75% of total auto sector employment, nearly five times the number of workers employed by GM and Chrysler. It's astonishing how interwoven the economy is, and a bit frightening to think of how many other industries believe they may need a hand in order to survive the downturn.

Although fed funds futures are indicating better than a 60% chance of a Fed rate hike by the December FOMC meeting, there seems to be very little possibility that this could happen until the bad news shifts from not-so-bad to good. As of now, it is not.

Good news for stock holders is that the optimistic markets are up again with the DOW topping 8,800 for the first time in five months.

Market Indications as of 10:30 a.m. Central Time
DOW - up 73 to 8,812
NASDAQ - up 14 to 1,867
S&P 500 - up 8 to 944
1-Yr T-note up 0/32 to 0.52%
2-Yr T-note up 0/32 to 1.34%
5-Yr T-note up 0/32 to 2.92%
10-Yr T-note up 5/32 to 3.92%
30-Yr T-bond down 2/32 to 4.76%

Interest Rates Rise in Anticipation of Recovery

The financial markets have determined that an economic turnaround has either begun, or will very shortly. Longer yields are moving up in anticipation of increased economic growth and corresponding inflation. Yields on the short end are inching higher as investors start to price in Fed rate hikes later in 2009. One of the ironies of long-term rates moving higher following scattered signs of economic improvement is that this upward movement could inherently slow economic growth before we actually experience it.

As far as the short end is concerned, the notion of a Fed rate increase anytime in 2009 is premature. The recovery (if indeed that's what's happening) is shaky. A week ago, Fed Chairman Bernanke provided a forecast for economic growth to "turn up" later in the year, but cautioned that any recovery would depend on "improvement in credit conditions". At the same time, Kansas City Fed President Hoenig warned that economic recovery would likely "be slower and more fragile than we'd hoped for".

Falling gasoline prices helped buffer the U.S. economy at the tail end of 2008, putting critical dollars back into consumers pockets ...but the trend has reversed itself in 2009. In the past month alone, the average gas price is up by 48 cents, sapping spending power at the annual rate of $1.3 billion for every additional penny spent at the pump. Reuters reported last Wednesday that one in nine Americans are now on food stamps, while the Mortgage Bankers Association reported that 12% or one in eight U.S. mortgage borrowers was either delinquent or in some stage of foreclosure in the first quarter.

The housing sector is still sputtering. Although both new and existing home sales crept higher in May, they did so with the help of government subsidized lending rates - at least for the time-being, sub-5% 30-year fixed mortgages are gone. New home sales are still down 75% from their 2005 peak while existing home sales are down 35%. Inventories of homes available for sale are no longer at bloated record levels, but they are pretty close ...and they're continually being supplemented by newly foreclosed properties. Higher long-term lending rates are likely to hinder future home sales and snuff out most refinancing opportunities. Unfortunately, rising unemployment will be another hindrance to housing recovery. Unemployed workers typically don't purchase homes.

The official U1 unemployment rate jumped from 8.9% to 9.4% in May and is generally expected to reach 10% later this year. The U6 unemployment rate which includes "discouraged workers", part time workers who would like to work full time, and those who would like to work but have not looked for work recently, is a huge 16.4%. While the smaller-than-expected drop in May nonfarm payrolls was welcomed by the media and those of us hungry for recovery, the U.S. still lost 345,000 jobs; not bad when compared to the massive 741,000 jobs lost in January, but still dismal. Since the recession began, more than 6 million jobs have been lost. The assumption the markets are making right now is that the job loss will continue to slow significantly and job gains will begin shortly thereafter. But there's considerable data suggesting that companies won't be quick to hire back workers.

An article in this morning's Wall Street Journal stated that many companies have resorted to cutting salaries and hours as an alternative to laying workers off. This implies that slack in the labor market is more severe than the unemployment rate suggests. Last Friday, the San Francisco Fed released an economic letter entitled "Jobless Recovery Redux?" In the letter, Fed officials wrote that companies that stop cutting jobs typically don't start hiring for some time, and reiterated the point that the labor market slack is considerably higher than the official unemployment rate suggests as a result of record numbers of involuntary part-time workers.

The reason for tossing cold water on the recovery party is simply to temper expectations for near-term Fed rate hikes. The picture is still developing, but while gasoline prices, interest rates and unemployment all rise, the chances of real, sustainable recovery dampen. Bloomberg News reported that 15 of 16 primary dealers don't expect a rate hike before 2010, while a majority don't anticipate an initial rate increase until the second half of next year.

Market Indications as of 3:30 p.m. Central Time
DOW - down 1 to 8,763
NASDAQ - up 17 to 1,860
S&P 500 - up 1 to 939
1-Yr T-note up 1/32 to 0.53%
2-Yr T-note up 6/32 to 1.30%
5-Yr T-note up 8/32 to 2.87%
10-Yr T-note up 4/32 to 3.85%
30-Yr T-bond down 22/32 to 4.66%

Yields Rise Sharply on Employment Report

The yield on the 10-Year Treasury note briefly touched 3.89% as the headline on today's payroll report showed the economy lost just 345,000 jobs last month. That was much less than the 520,000 loss markets were expecting. The two-year T-note yield has also risen sharply in the wake of today's report, climbing as high as 1.20%, up 25bps from yesterday's close. Revisions to prior months added a combined 82,000 jobs to March and April data. Despite the better than expected change in payrolls, the unemployment rate came in worse than expected, climbing from 8.9% to 9.4%, the highest level since 1983. As has become the norm of late stock markets see the data through rose colored glasses and view today's data as an indication that the worst may be over and better days are just ahead. Today's employment report is another in a string of data that seem to support this notion. Yesterday's report of initial unemployment claims showed a decline to 621k, and the continuing claims figures unexpectedly fell, breaking a dubious string of 17 straight record highs.

Bonds have recovered some of their initial losses and stocks have given up today's gains as investors digest details of today's report. The details aren't as encouraging as the headline with job losses still evident in most major categories: manufacturing -156k, construction -59k, financial -30k, retail -18k, government -7k. The smaller loss in jobs came at the expense of hours worked as the overall average work week fell to 33.1 hours and the manufacturing work week slumped to a new low at 39.3 hours. The shrinking work week does not bode well for salaries and wages going forward.

Cold Water on The Party

For all the talk of green shoots in the economy, I can't help but wonder if its all just positive thinking. So, at risk of being overly negative consider the following: The economy is still shedding jobs, and even smaller than expected losses are still losses. The Mortgage Bankers Association (MBA) reported last week that 9.1% of all mortgages were delinquent and that the percentage of loans entering foreclosure rose to nearly 1.4%, both new records. The MBA also reported that one in eight Americans are now either late on a payment or already in foreclosure. Reuters reported this week that one in nine Americans are using federal food stamps to help buy groceries with more than 33 million enrolled in that program. With unemployment officially reaching 9.4% and climbing, nearly one in ten Americans are out of work. By some estimates one in six are either unemployed or underemployed. Sales at retail stores remain depressed as stores including Target, Costco, Macy's, Dillard's, and Sak's all reported steeper than expected declines in sales for May. Mortgage rates have followed Treasury yields higher and according to Freddie Mac's weekly survey jumped from 4.91% last week to 5.29% this week, not a good sign for the still struggling housing market. Gas prices are up 50 cents per gallon since early April. I will certainly acknowledge that the rate of decline in many indicators has slowed and there are some positive signs emerging, but I think we need to temper our expectations a little bit. There are still plenty of problems in this economy.

Bond Yields Likely To Remain Under Pressure

Fixed income investors will need to remain very cautious. Emerging signs of an improving economy will foster further talk of inflationary pressures. Rising equity prices are spurring more risk taking, leading investors out of bonds and into equities. Massive government borrowing is adding tremendous supply to the market as the U.S. will sell $65 billion of securities next week alone. All of these factors seem likely to push bond prices lower and yields higher.

Market Indications as of 9:43 a.m. Central Time
DOW - up 42 to 8,793 (in positive territory YTD)
NASDAQ - down 1 to 1,849 (up 17% YTD)
S&P 500 - up 1 to 943 (up 4% YTD)
1-Yr T-bill to 0.54%
2-Yr T-note down 16/32 to 1.21% (yield is up 30bps this week, most of it coming today)
3-Yr T-note down 22/32 to 1.76%
5-Yr T-note down 31/32 to 2.80%
10-Yr T-note down 27/32 to 3.82%
30-Yr T-bond down 21/32 to 4.62%

ISM Data Suggests Recovery to Some

The data contained in the May Institute for Supply Management (ISM) survey suggested to a number of economists that the recession may be over. The recent stock market rally, rising commodities prices and a significant back-up in bond yields suggest that financial market participants perceive the same thing.

The ISM factory index rose from 40.1 to 42.8 in May, the highest level since September. Several components within the composite index were even stronger. The new orders index jumped from 47.2 to 51.1, export orders rose from 44 to 48 and the production index increased from 40.4 to 46, the highest level in nine months. Bloomberg News reported this morning that John Ryding, Chief Economist at RDQ economics wrote "the ISM report is a very important indicator of the cyclical state of the economy and it tentatively suggests that May is a plausible candidate for the recession trough." Noted economist Ed Yardini thinks that the rate of contraction in GDP will slow significantly in the current quarter to a 1.2% decline before surging at a 5.3% positive rate in the final quarter of 2009. Much of the optimism is based on the leanness of U.S. business inventories - In the first quarter, inventory liquidations shaved 2.8 percentage points from GDP growth. In theory, if sales pick up, inventories will have to be rebuilt, which will add to the economic growth equation.

But the trouble is, when investors sense that recovery is on the horizon, interest rates have a tendency to rise. Investors begin to anticipate inflation and subsequent tightening of monetary policy by the Fed. In fact, this is already happening. The ten-year Treasury rate has risen from 3.09% to 3.70% in the past three weeks and mortgage lending rates have quickly followed. In the past week, according to bankrate.com, the average 30-year fixed rate rose from 5.00% to 5.32%, while the Wells Fargo's 30-year fixed rate increased from 4.875% to 5.375%. If a housing recovery were in full swing, any slowdown associated with a jump in interest rates might be a mere bump in the road, but the housing market is still struggling mightily and the recent jump in lending rates could have a severe negative impact on sales, refi's and homeowner's ability to hold onto their homes. Just last week, the Mortgage Bankers Association (MBA) reported that delinquencies rose to 9.12%, while the percentage of loans entering foreclosure rose to 1.37%. Both are new records. The MBA reported that one in eight Americans are now either late on a payment or already in foreclosure. With unemployment expected to rise through the remainder of the year, these numbers could get much worse.

The ISM data does look somewhat encouraging, but the timing of the survey misses the fallout from the GM bankruptcy. The bankruptcy filing was the third largest on record and the largest ever for a manufacturing company. The ripple effect of the GM failure could reverse the positive ISM numbers in the June survey.

On a side note, GM has been a member of the DOW industrial average for 83 years but will be replaced on June 8th by Cisco Systems. GM stock fell to $0.27 on Monday. Ironically, the DOW shrugged off yesterday's GM announcement and rallied 221 points.

On Friday, Labor Department will release the May employment report. The median forecast is for unemployment to rise from 8.9% to 9.2% while another 520,000 jobs are expected to fall from U.S. nonfarm payrolls. These numbers don't reflect recovery.

The DOW is up 36 points in early trading to 8,757. It began the year at 8,776 and reached a low of 6,547 on March 9.

Short-term interest rates are still at record lows and the Fed is largely expected to keep the overnight funds rate at zero to 0.25% well into 2010.

Market Indications as of 10:25 a.m. Central Time

DOW - up 36 to 8,758
NASDAQ - up 11 to 1,840
S&P 500 - up 5 to 943
1-Yr T-note up 0/32 to 0.40%
2-Yr T-note up 0/32 to 0.94%
5-Yr T-note down 4/32 to 2.52%
10-Yr T-note down 1/32 to 3.68%
30-Yr T-bond up 7/32 to 4.52%

Much of the Market's "Good News" is Actually Bad News in Disguise

A larger than expected rise in April durable goods orders in April may have appeared strong on the surface, but downward revisions to March effectively nullified the rise. April orders for goods intended to last for three years or more rose by +1.9%, much higher than median forecasts for a lesser +0.5% increase. The unfortunate problem is that the March (prior month) decrease got worse, falling from a previously reported -0.8% to -2.1%. Orders for non-defense capital goods excluding aircraft, fell by 1.5% in April after dropping by 1.4% in March. This reading is a proxy for future business investment and is used in calculating GDP (economic growth). This decline could prompt economists to revise their GDP forecasts downward. To some degree, experts are already tempering growth expectations even as the equity markets and consumer confidence measures suggest optimism. The National Association of Business Economics lowered GDP forecasts for the third and fourth quarters of 2009 from 1.0% to 0.7% and from 2.1% to 1.8%.

Initial jobless claims (a weekly count of newly unemployed workers filing for first-time benefits) was reported at 623,000 for the week ending May 23. To an optimist, this claims number was both 13,000 less than the prior week and 5,000 less than the median forecast, but continuing claims (the total number of people receiving unemployment benefits) rose from 6,678,000 to 6,788,000. This number began the year at 4,529,000 and has progressively increased each week in 2009, setting a new record every seven days.

New home sales rose by a less-than-expected 0.3% in April, taking the annualized number of new homes sold from 351k to 352k. The supply of new homes dropped by 4.2% pushing the new home inventory from a 10.6 month supply to 10.1 (still very high). The median sales price actually rose by 3.7% from very depressed levels, although prices are still almost 15% lower on a year-over-year basis.

Home sales could face further problems in the coming weeks as mortgage rates are on the rise. In fact, yesterday was a small disaster for those in line for mortgage financing or stragglers intending to refinance. Yesterday, bond prices on the long end plunged, driving yields higher. Ten-year Treasury-note yields jumped 19 basis points, the biggest single day increase in more than four months. Predictably, mortgage rates, got blasted. According to the Wall Street Journal - the average 30-year mortgage jumped from 5.03% to 5.29%. While long yields have risen dramatically, short yields are holding steady at record lows, a problem for short-term bond investors. The Wall Street Journal reported this morning that the gap between two- and 10-year Treasury-note spreads widened to 2.75 percentage points, the highest on record. This is a reflection of future inflation expectations.

The Fed has been buying mortgage-backed securities in massive volume in attempt to drive down borrowing costs. So far, it has purchased $460 billion in mortgage-backed securities and $125 billion in Treasuries. The plan has worked well up until recently as mortgage lending rates reached an all-time low of 4.61% in late March according to the Mortgage Bankers Association. Unfortunately, the market seems to be losing faith in the U.S. government's ability to sustain artificially low mortgage rates for much longer with over $2 trillion in government debt scheduled to be issued in 2009 alone. The idea that inflation is somewhere on the horizon has pushed longer yields higher. To nudge them back down again, the Fed will need to increase its purchases in a seemingly unending spiral. To compound the problem, mortgage investors reportedly unloaded $10 billion in lower coupon mortgage-backed securities yesterday - the ironic thing about the markets behavior was that the Treasury had just successfully auctioned off a record $35 billion in new five-year T-notes.

Moody's reaffirmed the AAA rating of the United States on Wednesday citing a "diverse and resilient economy, strong government institutions, high per-capita income and a central position in the global economy". Rising debt levels in the U.S. had drawn concern after S&P lowered the ratings outlook for the United Kingdom to negative threatening the UK's AAA rating. In past years, Japan and Canada had experienced downgrades related to debt burden as a percentage of GDP. Although the U.S. debt burden is still quite low relative to Japan and the UK, it is on the rise, and a lower rating would imply even higher borrowing costs.

General Motors announced this morning that it would be filing for chapter 11 bankruptcy protection on June 1 after bondholders refused a debt-for-equity swap that would have given them 10% of the restructured company in return for $24 billion in outstanding bonds. The 100-year old company will receive government financing while it seeks the sale of its assets. GM officials believe they could emerge from bankruptcy in as little as 30 days.

So far today, at least a portion of the sell-off in the bond market has reversed itself and stock prices are higher.

Market Indications as of 11:00 a.m. Central Time
DOW - up 49 to 8,350
NASDAQ - up 9 to 1,740
S&P 500 - up 8 to 900
1-Yr T-note up 0/32 to 0.46%
2-Yr T-note up 0/32 to 0.98%
5-Yr T-note up 1/32 to 2.46%
10-Yr T-note up 15/32 to 3.67%
30-Yr T-bond up 37/32 to 4.55%

From May 4 through May 11, 2009, Bloomberg News surveyed 61 top economists for their most recent opinions on the U.S. economy and interest rates. The following are summaries of their responses:

The Economic Forecast

Unemployment Rate - The median forecast for Q2 2009 unemployment was 9.10%. The median forecast for the next three quarters are 9.50%, 9.80% and 9.80%.

The change in nonfarm payrolls report, released May 8th, continued to show U.S. businesses' intent to reduce headcount. Total payrolls fell by 539,000 in April, while private-sector employment declined by 611,000, distributed fairly equally across all industries. The U.S. economy had lost 600,000 or more jobs each of the last five months prior to this report and would have this time if not for gains in the government sector, which added 66,000 workers. Most of the public sector hires were in preparation for the 2010 Census, according to the Bureau of Labor Statistics. Any gains made during April were quickly erased in the May report, as the change in total nonfarm payrolls were revised downward for February and March by 30,000 and 36,000, respectively.

According the BLS statistics, employers initiated 3,489 separate mass layoff events in the first quarter of 2009 that resulted in the termination of 558,909 workers. A mass layoff event occurs when an establishment has at least 50 initial unemployment compensation claims filed against it within a five-week period and the layoff lasts longer than 30 days. Of those employers surveyed, 27% indicated they anticipated some recall of workers, the lowest proportion since 1996 when this statistical series began. As of March 31st, job openings in the U.S. numbered 2.7 million, another record low since this data began being tracked 8 years ago. At 2.7 million in March, the number of monthly job openings was down 2.1 million (44%) since the most recent high point in June 2007. Not surprisingly, initial claims for unemployment insurance, a leading indicator of the health of the employment market, has remained above 600,000 for 15 straight weeks, while continuing claims have risen 1.6 million over the same time. Initial claims for the week ended 5/9/09 jumped 32,000 from the previous week, to 637,000.

The unemployment rate rose from 8.5% to 8.9% in April.

Real GDP (annualized economic growth) - The median GDP growth forecast for Q2 2009 is -2.00%. The median forecast for the next three quarters are +0.50%, +1.70% and +2.10%.

In last month's Bloomberg survey, Q1 GDP was forecasted to "improve" to negative 4.7%. Instead, the preliminary Q1 GDP numbers showed another 6.1% contraction. The unexpected decline was due in large part to continued unwinding of bloated inventories from businesses across the country. According to researchers with Citigroup, inventories shrank by $103.7 billion in Q1, versus $25.8 billion in Q4 of 2008. With inventory levels correcting at such a furious pace, the expectation is for a moderation in the recession over the next few quarters as businesses begin restocking the shelves. That scenario seemed to be playing out already, as Q1 consumer spending unexpectedly rose 2.2%.

Fast forward two weeks...April retail sales fell 0.4% versus flat expectations. This marks the second month of declines in the retail numbers as fewer available jobs and a decrease in household wealth continue to curb families' spending habits, particularly in discretionary items such as electronics and home furnishings. Given the continued weakness in demand from the consumer, only modest improvement is expected in Q2 GDP. The survey indicated a median GDP of -2.00%, but I'm afraid that number may have been skewed to the upside by a couple of very optimistic estimates calling for 3.2% Q2 economic growth.

The survey does show modest, yet sustained, economic growth towards the end of 2009, continuing into 2010.

Consumer Prices - The median annualized consumer inflation forecast for Q2 2009 was -1.20%. The median forecast for the next three quarters are -1.70%, +0.90% and +1.40%.

According to Neil Dutta, Merrill Lynch economist, deflation continues to be the predominant macro concern. Contributing to that risk are the steps being taken by the nation's retailers to slash prices in an effort to attract wary shoppers, although those efforts were proven unsustainable as net incomes fell and the number of pink slips grew. The Washington Post ran an article on Tuesday - "Prices Fall to Match a New Frugality" describing some of the adjustments companies are making to their products to offer them at more enticing prices.

Crude oil has rebounded off its lows in December by more than 70%, closing yesterday at $59.07. Ahead of the Memorial Day weekend, prices at the pump have also moved dramatically higher over the last few weeks, and are now at a national average of $2.267 per gallon, 21.6 cents more expensive than one month ago.

Millard Drexler, CEO of clothing retailer J. Crew, may have summed up the economic outlook most fittingly in the Washington Post article mentioned above, when he was quoted as saying, "I'm seeing it kind of sucks. I wish I had a better answer. I wish we could see the road map more clearly. It's just not the case."

Prices Fall To Match A New Frugality

The Interest Rate Forecast

Overnight Fed Funds - The MEDIAN fed funds forecast for Q2 2009 is 0.20%. The MEDIAN forecast for the next four quarters are 0.22%, 0.25%, 0.25% and 0.29%. The current fed funds rate is a range between 0.00% and 0.25%.

The statement from the Federal Reserve’s most recent meeting in April reinforced the idea that deflation remains a primary risk -- "the Committee sees some risks that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term."

The Federal Open Market Committee kept the target rate within the stated 0.00% - 0.25% range. According to the survey, no changes are expected in the fed funds rate for the remainder of 2009 and into Q2 2010. The Fed's next meeting is scheduled for June 24th.

Two-year Treasury-note - The average 2-year yield forecast for Q2 2009 is 0.98% The average yield forecast for the next four quarters are 1.07%, 1.23%, 1.44% and 1.75%. The current 2-year Treasury yield is 0.85%.

10-year Treasury-note - The average forecast for Q2 2009 is 3.04%. The average forecast for the next four quarters are 3.14%, 3.28%, 3.48% and 3.70%. The current 10-year yield is 3.09%.

Market Indications as of 4:00 p.m. Central Time

DOW - up 46.43 to 8,331
NASDAQ - up 25.02 to 1,689
S&P 500 - up 2.30 to 889
3-Mo T-Bill at 0.152%
1-Yr T-Bill at 0.473%
2-Yr T-note down 1/32 to 0.851%
5-Yr T-note down 19/32 to 1.961%
10-Yr T-note up 8/32 to 3.094%
30-Yr T-bond up 10/32 to 4.058%

Retail Sales Drop Sparks Equities Sell-off

The equity markets may have gotten a bit ahead of themselves in the past couple of months. The financial markets were expecting the recent upturn in consumer confidence to translate into a boost in consumer spending which in turn would boost economic growth. However, the confidence increase was due in large part to a huge rebound in the equity markets from early March lows. When retail sales actually fell 0.4% in April, stocks dropped for the third day in a row, which suggests that future confidence could fall along with the consumer's willingness to spend in the future. It all sounds pretty tragic, but frankly, analysts had predicted that retail sales would be unchanged, so the slight drop shouldn't have caused such a stir.

The April sales decline was led by electronics and appliance stores which fell 2.8%, food and beverage sales which dropped 1.0% and clothing sales which were down 0.5%. Gasoline station sales dropped by 2.3%. Since gas prices are up, it appears as though people might be driving less to save money.

Food and drinking establishment sales were up 0.2%, while health and personal care sales were up 0.4%.

Generally speaking, the near-term outlook for retail sales looks brighter. An extra $250 will be sent out to approximately 50 million social security recipients in May. The $12.5 billion total is expected to be largely spent based on the consumption patterns of the elderly recipients.

On a side note, retail sales in China rose 14.8% year-over-year in April, an improvement from the quite brisk 14.7% jump in March. China injected its economy with a massive $500 billion in stimulus dollars early on.

Other News of Worthy Note

Global Confidence on the Rise - The Bloomberg Professional Global Confidence Index climbed from 21.1 in April to 38.7 in May. Although this was the largest increase since the survey began 18 months ago, any number below 50 still suggests a negative outlook.

Credit Markets Continue to Unfreeze - the three-month LIBOR rate fell to a record low of 0.88% today. This drop in the interest rate that banks charge to borrow each others money, suggest that confidence in the health of global financial institutions has been largely restored.

Home Sizes are Shrinking - The National Association of Home Builders reported that the average size of a new home fell in 2008 for the first time in 35 years.

Starbucks Drops the Price of Iced Coffee - Merrill Lynch reported that Starbucks had dropped the average price of a medium iced coffee to just under $2 last week.

Home Prices Fall - The median price for a single family home fell by 14% year-over-year in the first quarter to $169,000 according to the National Association of Realtors. Since reaching a peak median home price of $227,600 in the third quarter of 2005, home prices are down 26%.

Mortgage Rates Ease Lower - The average 30-year mortgage rate fell from 4.79% to 4.76% for the week ending May 8. This is up from a record low of 4.61% the final week in March. Although conditions are favorable for home purchases, a majority of banks are still tightening their credit standards.

Home Foreclosures Rise - According to Realty Trac, one out of every 374 households, or 342,038 mortgage borrowers, received foreclosure notices in April. This established an unfortunate record high for the second straight month. Falling home prices and a rising unemployment rate are overwhelming government efforts to aid distressed homeowners.

GM Nears Bankruptcy - General Motors has until June 1st to come up with an acceptable plan to restructure and save itself from Chapter 11. It will need to convert debt to equity shares, negotiate more favorable labor contracts and reorganize its dealer network; daunting tasks for a short three-week timeframe. CEO Fritz Henderson has stated that bankruptcy is probable, but GM stock actually rose from $1.15 to $1.21 today.

None of this changes the expectation that the Fed will keep short-term rates at record lows throughout 2009 and well into 2010.

Market Indications as of 3:30 p.m. Central Time
DOW - down 184 to 8,285
NASDAQ - down 15 to 1,716
S&P 500 - down 22 to 885
1-Yr T-note up 0/32 to 0.49%
2-Yr T-note up 1/32 to 0.86%
5-Yr T-note up 7/32 to 1.97%
10-Yr T-note up 18/32 to 3.10%
30-Yr T-bond up 41/32 to 4.08%

The Pace of Lay-offs Slows

It just seems like good news - only 539,000 workers lost their jobs in April. That number would have appeared tragic last summer, but with an average of 700,000 workers receiving pink slips every month since December 2008, it was almost a relief. The median Bloomberg forecast was for a larger drop of 600,000 jobs in April. But in a sense, overall payroll loss was actually a bit worse since downward revisions to February and March subtracted another 66,000. Since the recession started back in December 2007, 5.7 million jobs have now disappeared.

Manufacturing was hit particularly hard in April with factory payrolls shedding 149,000 jobs after losing 167,000 in March. Workers in auto-related fields made up a large percentage with more than 29k workers laid-off during the month. One area where hiring actually took place was in the public sector with government payrolls rising by 72,000. Bloomberg reported that the Federal government has already begun hiring workers for the 2010 census. The Census Bureau expects to employ as many as 1.4 million to help conduct the massive survey compiled once every ten years.

The unemployment rate rose from 8.5% to 8.9% in April. This equaled the median forecast and was a full 4 percentage points above the February 2008 unemployment rate of 4.9%.

Stress Test Results are Ugly, but Clear

Yesterday afternoon, the Fed finally released the results of the much anticipated stress test and ordered 10 banks to raise a combined $74.6 billion in capital. Bank of America, thought in October to have largely dodged many of the financial problems encountered by the major Wall Street firms, fared the worst with $33.9 billion in capital required, followed by Well Fargo with a $13.7 billion shortfall and Citigroup needing $5.5 billion. Treasury Secretary Geithner said yesterday that he was "reasonably confident" that the deficient banks will be able to raise the needed capital without help from the government.

This morning, the Wall Street Journal, in a bold front-page headline that stretched from one end of the paper to the other, reported that the "Fed Sees Up to $599 Billion in Bank Losses". This worse case scenario, made as a result of stress tests, is for the nation's 19 largest banks through the end of next year ...if the U.S. economy does worse than expected.

The stress tests were widely criticized when first announced, Regulators argued at one point that the results should not be made public. Fear of knowing just how bad the banking situation was, drove the DOW to an 11-year low two weeks after the Fed announced its intention. But since then, the stress test has gained support. The final assessment was bad, but we can now see the floor. As Geithner said yesterday - "there is reassurance in clarity". At least we know.

As far this morning, despite continued weakness in the labor market and and the conclusion that the nation's banks need even more money to get themselves healthy, the market seems relieved and the DOW is up 122 points.

Market Indications as of 9:00 a.m. Central Time
DOW - up 122 to 8,532
NASDAQ - up 21 to 1737
S&P 500 - up 16 to 923
1-Yr T-note up 1/32 to 0.53%
2-Yr T-note up 1/32 to 0.97%
5-Yr T-note up 4/32 to 2.14%
10-Yr T-note up 10/32 to 3.30%
30-Yr T-bond up 12/32 to 4.27%

Stress Test Results Ease Market Stress

You wouldn't know it by reading the headlines, but the official results of the so called stress tests on banks and other financial firms won't be released until late this afternoon. But so much information has already been leaked that there seems to be very little the market doesn't already know. The short version is that things aren't so bad after all. While a handful of the big banks will need to raise some additional capital, the amounts are less than feared and much of it will be done through the magic shell game that is capital accounting. The government's preferred shares will simply get converted to common stock and somehow that is going to make everything better. Count me among the skeptics, but as the saying goes, don't fight the tape. The tape has sent stock markets higher in recent days, adding to April's gains and putting the S&P 500 in positive territory for the year. Stocks are slightly lower this morning but what has really struck me is that most stock markets have been moving higher, even in the face of negative news. Back in February headlines about swine flu, auto makers going bankrupt and banks needing to raise billions in capital would have sent markets plunging. There seems to be a change in attitude and confidence taking place. The belief that the worst may be past us and things are going to get better from here is an important shift in market psychology.

For Employment Data, Less Bad is the New Good

Yesterday's ADP employment change showed a decline of 491k jobs, but that was a much smaller decline than expected. Today's data on initial claims showed another 601k workers filing for unemployment benefits last week. While that can hardly be considered good news, it is smaller than the 635k economists had forecast and it is the lowest reading since late January. Continuing claims came in at 6.35 million, setting a record for the 14th consecutive month, but never mind that. Since this glass is now half full, today's data is being viewed as another indicator that the worst may be over. The April employment report will be released tomorrow and Bloomberg's survey shows an expected decline of 600k jobs and an unemployment rate climbing from 8.5% to 8.9%. Anything less bad than those numbers will likely be viewed as a positive sign.

Yields on Treasury Notes Rise

With things looking up for the economy and stock markets, and the government auctioning off record amounts of debt, the Treasury market has really taken it on the chin. The yield on the 10-year T-note was less than 3% just two weeks ago, and if we look back to mid-April, the yield was around 2.75%. At one point this morning, the 10-year yield had climbed above 3.26%, a 50 bps increase in less than a month. The 30-year T-bond yield reached 4.18%. On the shorter end of the curve, the two-year T-note yield has also risen, approaching 1%. Yields on short agency securities continue to hold at very low levels, despite the back-up in Treasuries.

PS- In typical fashion, as I write this piece about how well things are going, the stock market turns south. Go figure.

Market Indications as of 9:35 a.m. Central Time
DOW - down 83 to 8,429
NASDAQ - down 34 to 1,725
S&P 500 - down 7 to 913
1-Yr T-bill up 1/64 to 0.50%
2-Yr T-note down 1/32 to 0.97%
3-Yr T-note down 2/32 to 1.45%
5-Yr T-note down 6/32 to 2.09%
10-Yr T-note down 11/32 to 3.22%
30-Yr T-bond down 21/32 to 4.13%

Manufacturing and Non-Manufacturing ISM Contract at a Slower Pace

Although the results of the April ISM survey (released last Friday) were very weak by historical standards, the weakness was less negative than it had been ...which makes it appear somewhat positive. The ISM factory index rose from 36.3 to 40.1 in April, still well below the breakeven point of 50, but showing several signs of improvement. There was significant improvement in the forward looking new orders component which surged 6 full points to 47.2 as well as in the employment index which rose from 28.1 to 34.4. Export orders increased from 39 to 44 and the production index rose from 36.4 to 40.4. Note that a number below 50 is still indicative of contraction, and a number below 45 is consistent with recessionary conditions ...but the good news is that fewer factory managers expect future deterioration. And "not-so-bad" has become the new good.

The large downward adjustment in first quarter business inventory, although painful at the time, seems to have paved the way for future production.

The non-manufacturing or service sector index (released today) rose from 40.8 to 43.7 in April, signaling that the service sector, which makes up almost 90% of the economy is also contracting at a lesser rate than earlier this year. The new orders index climbed from 38.8 to 47, while export orders jumped from 39 to 48.5. These are solid increases.

In other encouraging news, the University of Michigan index of consumer sentiment rose by the most in more than two years, climbing to 65.1. Much of the increases associated with confidence readings have to do with stock market performance.

The financial markets took the largely expected announcement of Chrysler’s bankruptcy in stride. The company will operate under bankruptcy protection but is expected to significantly downsize its operations substantially with its good assets being taken over by Fiat.

Bank Stress Test Results Released

The results of the much anticipated stress tests on the 19 largest U.S. financial firms will be released to bank executives tomorrow and to the public on Thursday, but between now and then, there is considerable speculation on the outcome, The banner headline of today's Wall Street Journal reads "More Banks Will Need Capital" and that article says that 10 of the 19 banks will be required to boost capital. A Bloomberg News report released this morning claims that of the 12 commercial banks being tested, only JP Morgan will pass. Interestingly, the equity markets don't seem to care too much at this point, even though the apparent recovery of the banks has been a major spark that has driven the S&P 500 up 34% since March 9th when the major indexes reached 12-year lows. Yesterday's 3.4% rise pushed the S&P into positive territory for the year, although the Wall Street Journal reported that the S&P was still down 42% from its high in October 2007.

The equity markets have turned downward this morning after being up as much as 31 points in early trading.

Yields on government bonds are still very low. Bullet agencies paying 1% yields don't appear until the 18-month maturity range. The spreads between agencies and Treasuries are narrowing significantly. A two-year agency now earns only 20 basis points more than a Treasury-note with the same maturity date. The spread reached a high of 180 basis points in October as the financial markets cast a nervous eye on Fannie and Freddie.

Market Indications as of 10:15 a.m. Central Time
DOW - down 30 to 8,397
NASDAQ - down 22 to 1,742
S&P 500 - down 7 to 895
1-Yr T-note down 1/32 to 0.48%
2-Yr T-note down 1/32 to 0.96%
5-Yr T-note down 2/32 to 2.03%
10-Yr T-note down 0/32 to 3.15%
30-Yr T-bond down 1/32 to 4.05%

GDP Drops at Faster Pace than Predicted in the First Quarter

According to the latest Bloomberg News survey, the median economist forecast had called for a 4.7% annualized decline in GDP growth for the first quarter of 2009 following a 6.3% drop in the final quarter of 2008. This morning, the Commerce Department reported that GDP had contracted at a much larger 6.1% pace. The back-to-back 6.3% and 6.1% readings marked the worst 6-month period of economic decline in more than 50 years.

There were several reasons for the larger than expected drop. The first and most obvious was that business inventories had fallen by $103.7 billion during the quarter, the largest decrease since record keeping began in 1947. The significance of this is that when businesses cut back on inventories and sales subsequently pick up, the inventories have to be rebuilt, which effectively shifts positive growth forward into future periods suggesting higher than expected growth next quarter. Another reason for the unexpectedly large drop in economic growth was a 3.9% cut in government spending. The decrease was a result of cutbacks in both defense spending and Federal spending on local governments. The stimulus package allocation to local governments has yet to kick in, but is also expected to contribute to future growth.

While inventories were down big and government spending fell, consumer spending actually rose 2.2%, a sharp increase from the second half of 2008, during which time spending by consumers fell by an average of 4.1%.

The first quarter GDP reading released this morning is preliminary and will be subject to revision in both May and June.

Confidence Jumps in April

The Conference Board's measure of consumer confidence rose to a five-month high of 39.2, up from 26.9 in March and a record low of 25.3 in February. Much of the increase is attributed to recent gains in the equity markets and a belief among consumers that the labor market will improve later this year. Much of the economic decline in the last six month has been fueled by a lack of confidence. Thus, confidence measures assume a higher degree of importance than usual.

In other news -

Fed officials will meet today in the third FOMC meeting of 2009. Since overnight rates are already near zero, there is little of the typical suspense surrounding Fed meetings.

Bank of America shareholders will vote today on whether to retain CEO Ken Lewis as the Chairman of the Board.

Preliminary results of the new bank stress tests indicate that at least six of the 19 largest banks will require additional capital. Experts believe that most of the needed capital would likely come from the conversion of preferred stock to common stock.

Oddly enough, the stock market is rallying. One of the apparent reasons is a difference of opinion on the stress tests, the results of which won't be released until May 4th. According to CNBC, David Trone, an analyst for Fox-Pitt Kelton abruptly upgraded the entire banking sector after his company ran its own stress tests and found that none of the 19 banks needed additional funds.

The DOW is up 158 in early trading.

Market Indications as of 9:40 a.m. Central Time
DOW - up 158 to 8,174
NASDAQ - up 37 to 1,710
S&P 500 - up 17 to 872
1-Yr T-note up 1/32 to 0.45%
2-Yr T-note up 1/32 to 0.93%
5-Yr T-note up 4/32 to 1.94%
10-Yr T-note up 8/32 to 2.98%
30-Yr T-bond up 28/32 to 3.91%

Existing Housing Sales Drop

Apparently, the mini housing rebound experienced in February was an initial reaction to lower mortgage rates, unseasonably warm weather and a faulty seasonal adjustment, because home sales turned downward in March. The sales of existing homes fell by 3% last month after rising by the most in five years the prior month.

The National Association of Realtors reported that distressed properties accounted for approximately 50% of all March sales. A constant stream of foreclosures is keeping inventories high. In fact, the inventory of existing homes rose from a 9.7 month supply in February to 9.8 in March. A healthy market would reflect a five- to six-month supply. First-time homebuyers, given an additional boost through an $8,000 tax credit, accounted for 51% of the purchases last month.

The 30-year average mortgage rate remained near historical lows at 4.73% for the week ending April 17, according to the Mortgage Bankers Association. Thirty-year rates are down 126 bps since November, while 15-year rates have dropped by 132 bps. The lower mortgage rates, along with distressed home values have pushed affordability to record highs. The NAR affordability index is currently at its highest level in 20 years of tracking history.

The FHFA home price index has risen slightly in each of the past two months, suggesting that home prices may finally be starting to stabilize. This is one of several essential elements to economic recovery.

Although most experts forecast economic growth to resume by the end of 2009, the overnight fed funds target is expected to remain at 0% to 0.25% until late 2010.

Other News of Note

Unfortunately, the labor market, another ingredient to the recovery mix, has yet to slow any signs of improvement. Initial claims, or first-time filings for state unemployment benefits, rose by 27k last week to 640k. Continuing claims rose by 93k to 6.14 million. The total number of people receiving unemployment benefits set a record for the 12th consecutive week.

General Motors announced plans to shut down most of its manufacturing plants for an extended nine-week period instead of the usual two in order to work off the large inventory of unsold vehicles. As of March 31, GM had a 113-day supply of cars and a 123-day supply of trucks.

Time Magazine reported last week that:

49% of Americans are spending less on clothes; 56% are spending less on eating out at non-fast food restaurants; 38% are spending less on sporting events; 25% are spending less on gambling; 36% are spending less on newspapers and magazines; 28% are spending less on alcohol; 37% are using more coupons; 29% are exercising more; 32% are spending more money on bulk food and supplies; and 43% are spending more time watching the news.

Market Indications as of 11:33 a.m. Central Time
DOW - down 44 to 7,842
NASDAQ - down 10 to 1,636
S&P 500 - down 3 to 846
1-Yr T-note down 1/32 to 0.47%
2-Yr T-note down 2/32 to 0.95%
5-Yr T-note down 2/32 to 1.90%
10-Yr T-note up 2/32 to 2.94%
30-Yr T-bond down 2/32 to 3.80%

From March 30 through April 8, 2009, Bloomberg News surveyed 55 top economists for their most recent opinions on the U.S. economy and interest rates. The following are summaries of their responses:

The Economic Forecast

Unemployment Rate - The median forecast for Q2 2009 unemployment was 8.90%. The median forecast for the next three quarters are 9.20%, 9.50% and 9.95%.

As Scott wrote in his commentary earlier this morning: The number of unemployed workers filing for first-time benefits fell last week, but the total number of people receiving ongoing compensation rose to a record high. First time claims fell by 53,000 to 610,000 for the week ending April 11, while continuing claims rose to 6,022,000.

Any positive news is certainly a valued commodity these days, so it is difficult, and somewhat disheartening, to dismiss the 53,000 reduction in first time claims. The reduction likely has more to do with there being one less day in the last workweek across much of the nation, than it does about a lasting resurgence in the economy. It is disconcerting that continuing claims did not also decline, even with a shortened workweek. While the ebbs and flows of initial claims do not necessarily track in tandem with the nonfarm payrolls number, it is certainly a good indicator of its direction. According to David Rosenberg, Chief North American Economist at Merrill Lynch, the current levels of initial claims is consistent with nonfarm payroll declines of 700,000.

Not surprisingly, Mr. Rosenberg's Q2 unemployment forecast was among the highest of those surveyed at 9.30%. Some predictions were less bearish, but all but 2 of the 55 participants expected unemployment in Q2 above its current 8.5% level. 10% unemployment is not forecasted to occur until Q2 2010, but there were a spattering of 10-handles earlier than that. Hopefully, the jobs lost are not permanent and some of the companies conducting the layoffs will begin to rehire soon.

Real GDP (annualized economic growth) - The median GDP growth forecast for Q1 2009 is -5.00%. The median forecast for the next three quarters are -2.00%, +0.30% and +1.50%.

Preceding a report earlier this week indicating an unexpected 1.1% drop in retail sales in March, Federal Reserve Bank of Dallas President Richard Fisher described current economic data as “grim” and suggested the U.S. economy "contracted at an equally dismal rate" last quarter (Q1). Mr. Fisher continued by reiterating his prediction that we would see a 10% unemployment rate before this year ended. According to the Bloomberg survey, gross domestic product contracted at a 5.00% annual rate in Q1. Mr. Fisher did suggest that the policies enacted by the central bank are likely to help end the U.S. recession, and that government stimulus measures should begin to impact the U.S. economy in Q2.

The survey seems to bear out his position, as the median estimate for Q2 GDP was -2.00%, with modest growth returning in quarters three and four.

Consumer Prices - The median annualized consumer inflation forecast for Q2 2009 was -1.00%. The median forecast for the next three quarters are -1.55%, +1.10% and +1.85%.

Again, borrowing from Scott's morning commentary: The Consumer Price Index (CPI) was negative on a year-over-year basis for the first time since 1955, dropping by 0.1% for the month of March and 0.4% from 12 months earlier. As was the case with the March PPI, the majority of the decline was energy-related. When food and energy prices are excluded, the "core CPI" rate was actually up 0.2% for the month and 1.8% year-over-year.

While many have voiced concern over the possibility of deflation further destabilizing an already anemic economy, it is encouraging to see core CPI in positive territory. In March, consumer energy prices fell 3 percent, reversing a 3.3 percent rise the month before. Gas prices fell 4 percent in March, home heating oil plunged 8.5 percent, and natural gas slid 4.8 percent.

The Interest Rate Forecast
Overnight Fed Funds - The MEDIAN fed funds forecast for Q2 2009 is 0.13%. The MEDIAN forecast for the next four quarters are 0.13%, 0.14%, 0.25% and 0.25%. The current fed funds rate is a range between 0.00% and 0.25%.

Minutes from the Federal Reserve’s most recent meeting in March show that policy makers feared the U.S. economy might fall into a "self- reinforcing cycle of rising unemployment and slumping business and consumer spending". The Fed's bearish outlook predicted real GDP “to flatten out gradually over the second half of this year and then to expand slowly next year as the stresses in financial markets ease.”

At their last meeting in March, the Federal Reserve's Federal Open Market Committee kept the target rate within the stated 0.00% - 0.25% range. According to the survey, no changes are expected in the fed funds rate for the remainder of 2009 and into Q2 2010. The Fed's next meeting is scheduled for April 29th.

Two-year Treasury-note - The average 2-year yield forecast for Q2 2009 is 0.90% The average yield forecast for the next four quarters are 1.02%, 1.18%, 1.38% and 1.58%. The current 2-year Treasury yield is 0.903%.

10-year Treasury-note - The average forecast for Q2 2009 is 2.75%. The average forecast for the next four quarters are 2.87%, 3.05%, 3.27% and 3.44%. The current 10-year yield is 2.837%.

Market Indications as of 4:00 p.m. Central Time
DOW - up 95.81 to 8,125
NASDAQ - up 43.64 to 1,670
S&P 500 - up 13.24 to 865
3-Mo T-Bill at 0.122%
1-Yr T-Bill at 0.509%
2-Yr T-note down 3/32 to 0.903%
5-Yr T-note down 11/32 to 1.775%
10-Yr T-note down 19/32 to 2.837%
30-Yr T-bond down 31/32 to 3.716%

Housing Starts and Building Permits Drop in March

Although historically low mortgage lending rates and record home affordability have recently boosted new and existing home sales, other housing indicators are still signaling weakness. Housing starts unexpectedly fell 10.8% to an annual rate of 510,000 in March, while building permits, an indicator of future construction, fell 9% to a record low of 513,000. The National Association of Home Builders / Wells Fargo confidence index rose from a historical low of 9 to 14. Although this increase looks healthy, any reading below 50 suggests conditions are "poor".

Unemployment Benefit Recipients Climb

The number of unemployed workers filing for first-time benefits actually fell last week, but the total number of people receiving ongoing compensation rose to a 26-year high. First time claims fell by 53,000 to 610,000 for the week ending April 11, while continuing claims rose to 6,022,000. These weekly numbers suggest that the labor market is still contracting at a significant rate. Because employment is a lagging indicator, it will take a while before hiring resumes.

Consumer Prices Fall

The Consumer Price Index (CPI) was negative on a year-over-year basis for the first time since 1955, dropping by 0.1% for the month of March and 0.4% from 12 months earlier. As was the case with the March PPI, the majority of the decline was energy-related. When food and energy prices are excluded, the "core CPI" rate was actually up 0.2% for the month and 1.8% year-over-year.

The bottom line as far as recent economic data is concerned is that the economy is still on the decline ...although perhaps at a lesser rate of decline from the first quarter pace of -6.3%. Less consumer demand translates into lower inflation. Low inflation allows interest rates to stay low, hopefully contributing to some economic revival in the coming months.

Despite the poor economic data reports, stock prices were up in early trading. The primary reason seems to be that JP Morgan Chase, the nation's second largest bank, reported record investment banking revenue of more than $8 billion dollars in the first quarter and profit that handily beat analyst's expectations.

Market Indications as of 8:42 a.m. Central Time
DOW - up 19 to 8,042
NASDAQ - up 10 to 1,636
S&P 500 - up 5 to 853
1-Yr T-note down 1/32 to 0.52%
2-Yr T-note down 1/32 to 0.87%
5-Yr T-note down 6/32 to 1.74%
10-Yr T-note down 11/32 to 2.81%
30-Yr T-bond down 23/32 to 3.70%

Retail Sales Drop

Apparently, the U.S. consumer isn't feeling quite as upbeat as we'd thought. Retail sales, expected to rise by 0.3% in March following a previously reported 0.1% February decline, actually fell by 1.1%. The decline was widespread, with sales at auto dealerships and auto parts stores falling 2.3% and restaurant and bar sales dropping 1.4%. Of the major categories, only sales at grocery and health food stores showed increases. The most likely reasons for the unexpected decline in sales are the deteriorating labor market and the late Easter holiday, which probably pushed sales out of March and into April. When autos, gasoline and building materials are excluded, sales fell 0.9%, essentially nullifying the 0.9% gain in February. This particular measure is used to calculate the consumer spending portion of GDP. Today's weak report suggests that economic growth in the first quarter may be weaker than previously thought.

Producer Prices Appear Deflationary

The March Producer Price Index (PPI) was reported much lower than experts had predicted. The Bloomberg News median forecast was for overall PPI, on a month-over-month basis, to be unchanged. The actual number was down 1.2%. On a year-over-year basis, overall PPI fell 3.5%, the biggest decline since January 1950. The majority of the drop is energy-related. If food and energy prices are excluded, core PPI was unchanged for the month and up 3.8% year-over-year. Reduced demand as a result of the global recession is the primary cause of the falling prices.

The consumer price index (CPI) will be released tomorrow. Experts predict a 0.1% rise in both the overall and core CPI for March. Consumer prices were rising at a 0.2% year-over-year rate in February. The Bloomberg New median forecast is for a 0.1% year-over-year drop in March. The apparent deflation is unwelcomed.

The problem with deflation is that consumers will postpone spending plans if they expect to pay lower prices in the future. This would compound the current economic problems. If consumers are not spending money, companies won't be able to sell products and will have to cut production and lay-off workers. Rising unemployment leads to even lower demand for goods and services which in turn push prices still lower. Once a deflation spiral is established, it's hard to control. It's unclear how markets would react as deflation is rare.

Other Market News

Fed Chairman Bernanke, in a speech today in Atlanta said there are signs that the “sharp decline” in the U.S. economy is slowing; potentially, a “first step” toward a recovery. He went on to say that he was "fundamentally optimistic about our economy” and that "economic conditions are difficult, but the foundations of our economy are strong, and we face no problems that cannot be overcome with insight, patience, and persistence.”

Goldman Sachs, anxious to pay back $10 billion in TARP funds received in October, sold 40 million shares of its stock at $123 per share, raising roughly $5 billion in cash. Although this share price was down slightly from $130 yesterday, it was significantly above the November low of $52 per share. Acceptance of TARP funds places restrictions on the compensation that financial institutions can pay their executives. By paying back TARP money, Goldman will not be subject to the cap.

The DOW is down 64 points on the day, but is still up 21% from the 12-year low reached on March 9th. It'll be interesting to see if the equity markets can shake off the poor retail sales data.

Market Indications as of 10:50 a.m. Central Time
DOW - down 64 to 7,993
NASDAQ - down 15 to 1,638
S&P 500 - down 6 to 848
1-Yr T-note up 1/32 to 0.52%
2-Yr T-note up 2/32 to 0.83%
5-Yr T-note up 4/32 to 1.21%
10-Yr T-note up 18/32 to 2.79%
30-Yr T-bond up 27/32 to 3.66%