Thursday is the star student of the week. It just has more of everything than the previous two days or Friday. We're not sure how interested markets are in domestic economic data just yet (we're not even sure if markets are back from Labor Day vacations), but to whatever extent they are interested, we'll get two decent ones at 830am tomorrow: the with-you-as-always Jobless Claims and the once-monthly look at the Trade Balance. At 9am, auction sizes will be announced for the following week (reduction any time now?). There's Fed-Speak from Bernanke at 1pm, and Consumer Credit prints at 3pm which can occasionally be a minor market mover. On a final note, although it pertains more to Friday's trading day, Obama speaks at 7pm to a joint session of congress on the administrations new Jobs proposal. For a detailed look at the entire week of economic events, see the following link:

A substantial 2 day rally is underway in stocks and this is coinciding with a perhaps slightly less substantial pressure on fixed income, particularly the longer maturity stuff which includes production MBS. The long end of the curve is also perhaps "unwinding" the aggressive flattening (long maturities dropping in yield more than short maturities) it experienced due to speculation that the Fed is soon to embark on efforts to sell short maturities to buy long (this was done in the past and called Operation Twist). Twist 2.0 is certainly a possibility and markets have certainly been trading that rumor. They're simply in the process of trying to get it right. We should expect a bit of volatility and uncertainty in the process. We could also be seeing a very slight reaction to the Beige Book which was perhaps not pessimistic enough for current yield levels. 10yr yields got close to 2.0 on a few occasions today but are currently back over 2.04. As continues to be the theme, MBS outperform into these sell-offs and Fannie 4.0's are only down 5 ticks on the day at 104-09, and 3.5's are down only 8 ticks at 101-14.

(Reuters) - The sluggish U.S. recovery failed to gain any speed in recent weeks and softened in some areas of the nation, the Federal Reserve said on Wednesday. "Economic activity continued to expand at a modest pace, though some Districts noted mixed or weakening activity," the Fed said in its Beige Book collection of anecdotal reports of economic conditions in the 12 Fed districts. Growth was modest or slight in five districts, while the remaining seven described activity in terms such as "very subdued" or "more slowly." In the Fed's last Beige Book covering the period into early July, eight regions characterized growth as having slowed. Consumer spending increased in most districts, but spending on items besides cars was flat or down in several places through late August, Fed said. Manufacturing conditions were mixed across the country and had slowed in many districts, the central bank said. Hard-hit residential real estate markets remained weak overall. Price pressures edged lower, although retail prices rose in some districts, the Fed said. Labor markets were generally stable and some districts reported modest gains. (Reporting by Mark Felsenthal; Editing by Andrea Ricci)

MBS Prices experienced a nasty little dip heading into the 10am hour, right around "rate sheet time." Some lenders came out fairly conservatively as a result. 4.0's are back to 104-11 after being as low at 104-02. 3.5's back to 101-17 after hitting 101-06. We'd imagine that it wouldn't take too much longer at current levels before we start to see reprices for the better among lenders who priced in that earlier weakness.

(Reuters) - The U.S. Federal Reserve should ease monetary policy further to help the job market, and consider promising to keep rates low until unemployment drops to at least 7.5 percent, a top Fed official said on Wednesday. "We need to take strong action now," Chicago Federal Reserve Bank President Charles Evans said in remarks prepared for delivery to the European Economics and Financial Centre in London. With inflation expected to stay below the Fed's 2 percent target in the medium term and unemployment registering 9.1 percent in August, the case is clear for more aggressive easing, he said. "Given how truly badly we are doing in meeting our employment mandate, I argue that the Fed should seriously consider actions that would add very significant amounts of policy accommodation." "If 5 percent inflation would have our hair on fire, so should 9 percent unemployment," Evans said. "The bottom line is that a conservative and tough-minded central banker can still value deviations in unemployment from the natural rate equally with deviations in inflation from its target." Evans, a voting member of the Fed's policy-setting panel this year, spoke a day ahead of a speech by Fed Chairman Ben Bernanke, who has said the central bank will use a two-day meeting later this month to consider further easing options. Evans said potential tools should include a promise to keep rates low until unemployment falls to 7.5 percent or even lower, as long as inflation stays below 3 percent. It could also peg policy to a nominal rate of GDP, he said, or make an explicit promise to allow inflation to rise above the Fed's target to make up for times that it has fallen below, a tool known as price-level targetting.

Today the National Association of Home Builders (NAHB) released its first NAHB/First American Improving Markets Index (IMI), a new economic index revealing metropolitan areas that have shown improvement for at least six months in three key economic areas—housing permits, employment and housing prices.

The list of metropolitan areas includes: -Alexandria, LA
-Anchorage, AK
-Bangor, ME
-Bismarck, ND
-Casper, WY
-Fairbanks, AK
-Fayetteville, NC
-Houma, LA
-Midland, TX
-New Orleans, LA
-Pittsburgh, PA
-Waco, TX


“Despite the challenging conditions in the national economy and housing sector, there are areas throughout the country where we are seeing pockets of improvement” said Bob Nielsen, chairman of the National Association of Home Builders (NAHB) and a home builder from Reno, Nev. “Housing conditions are local, and do not always reflect the national picture. We created this new index to shine a light on those housing markets across the country that have stabilized and have begun to show signs of recovery.”