To recap from yesterday, the equity markets had a nice day with the S&P up 2.2% to 1125.86, along with stocks finishing up over 200 points on the Dow.  Meanwhile, we saw the  “slight pause” that we talked about last week coming off from a mixed manufacturing report.  The ISM Manufacturing index fell from 56.2 to 55.5, beating the 54.5 Bloomberg estimate.  Of more concern than the slight fall was the larger drop from 58.5 to 53.5 in New Orders, an indicator that future manufacturing activity may cool.  The recovery has largely been driven by manufacturing from the rebuilding of inventories making this a key indicator of economic growth, at least until the consumer joins the game.

Early this morning, markets seem to be reacting to the Fed’s recognition that the pace of recovery is weakening and the 10-year rallied overnight to its lowest open in over a year at 2.90%.  P&G also reported lower than expected earnings pressuring stocks.  In the economic data, Personal Income and Spending were both unchanged month-over-month.  Additionally, last month’s figures were revised down .3% on income and .1% on spending.  Core PCE dropped 0.10% to 1.4% from the previous month.  There are no surprises in these releases, but they also confirm the continued weakness in the recovery.  We would expect to see little to no volatility in the Treasury market leading into Friday’s payroll report, given that we are now entering the black-out period for Fed comments as we approach next week’s FOMC meeting.  Chairman Bernanke spoke yesterday in South Carolina and made two noteworthy comments.  First, he reiterated his optimism that consumer spending would pick up in the 3rd quarter implying that he is leaning toward taking no new easing action in next week’s FOMC meeting.  Second, he continued his advocacy of extending the Bush tax cuts, saying that lawmakers need to be careful not to tighten, further slowing down the weak recovery.  Treasury Secretary Geithner also spoke yesterday on the topic of implementing new financial regulations.  He sounded more upbeat than Fed officials on the economy and assured markets that the new reforms would be efficient and led by a “roadmap” from the Financial Stability Oversight Council.

Morrtgage backs are up a smooth 8 ticks.  The range low would be about a 124-12 print and if we see a break below that level, hang on for another ride.  The chances of us hitting that level before Friday are small, however we are keeping the bias that has persisted for the past few weeks….  We look to still be headed for better Austin mortgage rates.  With the bounce back today, these are very nice levels.

Have a nice afternoon!