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Mortgage Backed Securities have rallied this a.m.

A mixed bag of news is causing bonds to rise slightly and stocks to fall. Germany is showing signs of trouble and concerns stocks. We also had a weak housing start number (bond friendly) and Fitch has affirmed their AAA rating for US bonds. Nice!

Treasuries and mortgages started a little better this morning with the stock indexes trading lower, suggesting a weak opening at 9:30. Mortgage markets stalled here for the last few days with markets consolidating recent strong moves. The stock market put three consecutive days up or the best showing in weeks, this morning a little pullback on the open.

At 8:30 July housing starts were expected down 3.5% but declined just 1.5%; building permits were right on forecasts, down 3.2%. Housing still in depression and likely will continue to be well into next year. Housing starts so far this year are running on a 566,000 pace for all of 2011. The result compares with last year’s tally of 587,000 starts, the second-fewest on record. Home construction totaled 554,000 units in 2009, the lowest since record-keeping began in 1959. During the past decade’s housing boom, starts reached a peak of 2.07 million in 2005. (data from Bloomberg)

July import prices were up 0.3% while US export prices declined 0.4%. Paying more for imports while earning less on exports. July imports followed a revised 0.6% drop in June.

At 9:15 July industrial production, expected +0.4%, increased 0.9%; July capacity utilization, expected at 77.0% from 76.7% in June increased to 77.5%. Better than expectations pushed treasuries down a little and mortgages lower. The better reports on housing starts and industrial production and capacity utilization helped take some pressure off stock indexes which were down 100 points on the DJIA to -55.

Fitch came out this morning affirming US credit rating at AAA; S&P lowered the US rating to AA2 and sent the stock market into a tail spin before recovering the last three days. S&P is feeling the pressure over its US downgrade. Eleven days after lowering the credit rating on the U.S. for the first time, the rating agency is suffering a downgrade among global investors as American bonds are proving world beaters — undermining S&P’s mathematical assumptions — and prompting disbelief among political scientists months after the company upgraded China because of the stability fostered by Communist Party rule.

At 9:30 the DJIA opened -90, the 10 yr note +3/32 at 2.30% and mortgage markets, choppy this morning, down 2/32 (.06 bp) at 9:30.

No growth in Germany in Q2, or in the euro zone overall. Germany’s GDP rose 0.1% from the first quarter, when it jumped a revised 1.3%. Economists had forecast growth of 0.5%. A separate report today showed euro-area economic growth slowed in the second quarter more than economists had forecast. Gross domestic product in the 17-nation euro area rose 0.2% from the first quarter, when it increased 0.8%; estimates were for an increase of 0.3%. The German DAX declined to, the first decline in four days, on the soft economic data.

German chancellor Merkel and French Pres Sarkozy will meet later; according to press reports there will be no discussions regarding issuing euro bonds in an effort to shore up those debt ridden economies in the zone.

The wider look for US interest rates remains positive, but we are becoming concerned that the benchmark 10 yr note tested and failed to break below 2.00% last week; below 2.00% would be the lowest rate on the 10 yr note since back in the 50s. The 10 hit 2.00% back in 2008 as the subprime crisis unfolded and took down Lehman Bros and others. It is less likely now that rates will fall much over the next couple of weeks as markets are likely to swing around with not much changing until the Jackson Hole conference that begins August 26th.

The Troll