Good Morning Everyone.

Rate sheet rebate and the "relief rally" suffered a setback yesterday afternoon following a marginally above average 10 year note auction yesterday. The tide has however turned this morning thanks to a round of weaker than expected economic data: RETAIL SALES and JOBLESS CLAIMS

The Commerce Department reports that Retail Sales fell 0.3% in December. This is much worse than the +0.5% print economist were expecting. Excluding autos, retail sales were down 0.2%...still worse than expected. On the upside, which hasn't had much traction in the bond market, November retail sales were revised up from +1.3% to +1.8%...that is a noticeable revision.

Leading the way lower was a 2.6% plunge in electronics and appliances sales. Miscellaneous store retails fell 1.0% and General Merchandise stores moved 0.8% lower.

The Labor Department released Jobless Claims data at 830 as well. Initial jobless claims for unemployment insurance rose to 444,000, an increase of 11,000 from 433,000 last week. Economists surveyed were anticipating 437,000 new jobless claims....so the data was worse than expected. Continuing Claims fell to 4.596 million from 4.807 million in the previous week. This portion of the report was better than expected, consensus called for 4.770 million continued claims.

States reported 5,002,180 persons claiming Emergency Unemployment Compensation benefits for the week ending Dec. 26. This is a decrease of 141,279 from the prior week. The EUC program, created on June 30, 2008, provides up to 20 weeks of federally-funded benefits to eligible unemployed workers who have collected all their regular state unemployment benefits. An additional 13 weeks of EUC are available in states with high levels of unemployment.

The reduction in emergency benefits was not a function of workers finding a job as much as their additional 13 weeks ending.

As MG pointed out last night, the 3.375 coupon bearing 10yr Treasury note found stable footing at 3.80%. This was supportive of our outlook for an attempted "relief rally" after the long bond auction today. The bond market has recovered a portion of yesterday afternoon's losses.

Currently 10s are +0-12 at 96-31 yielding 3.746%...yes we have ventured back to the all important 3.75% pivot point. Next stop on the corrective path would be 3.71% and then 3.68%.

Rate sheet influential MBS prices are improving along with their benchmarks. The FN 4.0 is +0-05 at 97-08 yielding 4.262% and the FN 4.5 is +0-05 at 100-11 yielding 4.469%. The secondary market current coupon is 2 basis points lower at 4.459%. The secondary market current coupon yield is 70 basis points higher than the 10 year TSY note yield and 61 basis points over the 10 year swap rate.

While positive progress as been made, the FN 4.5 failed its first attempt to break the 100-14 pivot point (resistance). Given the looming 1pm $13 billion long bond auction, it is not unexpected to see market participants a bit hesitant to push prices too far without trimming positions and taking profits.

Lenders should be passing along better rate sheets this AM....