Weekly jobless claims were expected to have increased by 14K based on surveys of economists and analysts; claims as reported fell 4K to 364K, the lowest weekly filings since April 2008. Continuing claims fell 79K to 3.55 mil; continuing claims figure does not include the number of Americans receiving extended benefits under federal programs. Those who’ve used up their traditional benefits and are now collecting emergency and extended payments decreased by about 136,300 to 3.51 million in the week ended Dec. 3. Three weeks now where claims have declined is evidence firings are declining and in turn should foreshadow an increase in employment and possible consumer spending.

Also at 8:30 the final read on Q3 GDP, expected unchanged from the prelim at +2.0%, growth was revised lower to +1.8%. Stock indexes were strong prior to 8:30; claims added some support but the GDP weighed on the other side. Nevertheless the indexes managed to hold gains but less than before the data.

At 9:30 the DJIA opened quietly at +20, the 10 yr note +9/32 at 1.94% -2 bp and mortgage prices +4/32 (.09 bp).  

More data at 9:55; the U. of Michigan consumer sentiment index, expected at 68.0 frm 67.7, the index jumped to 69.9; current conditions index at 79.6 frm 77.9 and the 12 month outlook index at 70.0 frm 64.0. Much stronger consumer sentiment added a few points to the DJIA but not much. The reaction in the bond market also subdued.

The final data today at 10:00, Nov leading economic indicators expected up 0.3% increased +0.5%.

Europe still gets most of the attention, always something to talk about given the cliff the region is teetering on. Not much today of market-driving info. The remainder of the day will be on thinner volume with the equity market taking the lead. So far this morning the stock market is struggling with the weaker GDP report for the 3rd quarter and the better weekly claims. The bond market focusing on the soft GDP but will lose gains if equity markets take hold later today; conversely if indexes succumb bonds will do better. That said, we do not expect much today with Christmas holyday's beginning tomorrow.

Interesting reactions today in the stock and bond markets; the data reported for the most part was better than thought, except toe Q3 GDP. After all the data the two markets are essentially unchanged from levels prior to the 8:30 reports. Still a bullish bias for the rate markets but if the holidays were not a factor the bond market would likely be soft. With the mess in Europe investors are not likely to lighten up on safety moves.

Early this morning the stock indexes were better after the strong rally yesterday, the bond and mortgage markets under pressure; by 9:00 the indexes reversed and were lower taking the rate markets back to unchanged. Trade continues to thin out with holidays coming on quickly, increasing the potential of volatility. Europe still holds the key; yesterday's rally in equities and selling in the bond market was driven to a large extent by Spain's sale of 3 mo bills at a rate about 4.0% lower than last month.

The ECB awarded 489 billion euros ($645B) in 3 yr loans today, the most ever in a single operation and more than economists’ median estimate of 293 billion euros.  The ECB said 523 banks asked for the funds, which will be lent at the average of its benchmark interest rate -- currently 1.0% over the period of the loans. The ECB is trying to ensure that banks have access to cheap cash for the medium term so that they can keep lending to companies and households. In addition to the longer-term loans, the ECB has widened the pool of collateral banks can use to secure the funds.

The DJIA opened slightly better at 9:30, +10; the 10 yr +2/32 at 1.92% unch and mortgage prices +1/32 (.03 bp).

The weekly MBA mortgage applications were down last week. The Market Composite Index, a measure of mortgage loan application volume, decreased 2.6% on a seasonally adjusted basis from one week earlier. The Refinance Index decreased 1.6% from the previous week. The seasonally adjusted Purchase Index decreased 4.9% from one week earlier. The refinance share of mortgage activity reached a high this year of 80.7% of total applications from 79.7% the previous week. The adjustable-rate mortgage (ARM) share of activity decreased to a low this year of 5.1% from 5.6% of total applications from the previous week.

At 10:00, a few minutes ago, Nov existing home sales were expected up 2.2%, increased 4.0% to 4.4 mil. The median sales price at $164,200 a decline of 3.5% yr/yr; based on sales there is a 7 month supply. The NAR revised sales between 2007 and 2010 down another 14% based on double listings; the revised sales show sales were even lower than what had been reported.

At 1:00 Treasury will auction $29B of 7 yr notes to complete this week's borrowing. The 2 yr and 5 yr didn't meet recent strong demand but both were modestly OK.

There is nothing new here; the bond market trade moving on how the equity market indexes trade; so far this morning stock indexes are weaker supporting the bond and mortgage markets. The MBS market isn't doing much recently, slight gains when the Treasury markets rally and not much decline in prices when treasuries trade lower in price as they did yesterday. We continue to believe the bond and mortgage markets will trade in narrow ranges through the remainder of the year.

Quiet but weak start today in the bond and mortgage markets. Europe's stock markets better except for the UK, its index down slightly. This week is likely to be thin trading with the holidays and an early close in the bond market on Friday. Although there are a number of key economic reports (mostly Nov housing), Treasury will auction $99B of notes, and Europe has a deadline (self-imposed) today for drawing additional aid to the debt crisis and to form new budget rules; trade should be quietly unchanged by the end of the week. That said, if there is any significant changes in the bond and stock markets it will be triggered by events in Europe. Euro-area officials aim to meet their deadline for today to arrange the IMF loans. The package entails about 150 billion euros pledged by euro-area central banks and another 50 billion euros to be contributed by non-euro EU states.

At 9:30 the DJIA opened +27, the 10 yr note traded -3/32 and mortgage prices were down 3/32 (.09 bp).

The only scheduled data today, Dec NAHB housing mkt index, expected at 20, increased to 21 frm 19 in Nov. Single family index at 22 frm 20; next six months index increased to 26 frm 25. (50 is the pivot for the indexes, above expansion, below contraction).

At 1:00 Treasury will auction $35B of 2 yr notes, likely it will be strongly bid as have been most Treasury auctions recently. The death of Kim Jung II in N. Korea should add more to the demand forUS debt.

This Week's Economic Calendar:

       Monday;

         10:00 am Dec NAHB housing market index (as reported

          1:00 pm $35B 2 yr note auction

      Tuesday;

          8:30 am Nov housing starts and permits (starts -0.8%, permits -2.8%)

          1:00 pm $35B 5 yr note auction

      Wednesday;

          7:00 am MBA mortgage applications

          10:00 am Nov existing home sales (+2.2%)

          1:00 pm $29B 7 yr note auction

     Thursday;

          8:30 weekly jobless claims (+14K to 380K)

                 Q3 final GDP (+2.0%, unch frm prelim report last month)

          9:55 am U. of Michigan consumer sentiment index (68.0 frm 67.7)

          10:00 am Nov leading economic indicators (+0.3%)

                        FHFA Oct price index ( +0.3%)

     Friday;

         8:30 am Nov durable goods orders (+2.0%; ex transportation orders +0.3%)

                      Nov personal income and spending (income +0.2%, spending +0.3%)

        10:00 am Nov new home sales (+1.9%)

Last week the 10 yr note yield declined 25 basis points, mortgage rates down 10 bp. Technically the bond market has improved while the MBS market, still holding nicely is being propped up by treasuries. Europe still the key driver for the lower US rates on movements into the US dollar through safety into treasuries. The low yield on the 10 occurred in Sept at 1.70% when Europe's debt problems infected Italy and Spain. Whether yields will get back to the historic lows depends on what happens in Europe; that is hard to handicap, there has been nothing but talk and plans but so far no progress to head of defaults or anything that takes the region back frm the cliff edge.

Yesterday the bond and mortgage markets were unchanged in very narrow ranges all day;today the markets starting the same way with little change from yesterday's closes. At 8:30 Nov CPI, the only data today, the overall and the core were expected +0.1%; as reported the overall was unchanged and the core (ex food and energy) up 0.2%. There was no reaction to the higher core in the bond market.

The stock indexes in pre-opening trade were better, at 9:00 the DJIA up 63 points. At 9:30 the DJIA  opened +55, the 10 yr note up 7/32 at 1.89% mortgage prices +1/32.

In Europe the various bourses are mixed with the FTSE up in the UK, Germany and French markets about unchanged. US equities are optimistic the European Union will meet a Dec. 19 deadline for funding a crisis-fighting package. U.S. stocks snapped a three-day decline yesterday after reports on jobless claims and manufacturing boosted confidence in the US economic improvement. According to leaders in Europe, the European Union should meet an informal Dec. 19 deadline for arranging loans to the International Monetary Fund as part of a crisis-fighting package. EU leaders decided at a Dec. 9 summit to channel an additional 200 billion euros ($261B) in loans to the IMF to help fight the euro region’s debt crisis.

Europe remains key to keeping US interest rates low; if Europe wasn't facing this crisis US interest rates given the recent improvements in most economic readings, the 10 yr and mortgages would likely be 25 to 30 basis points higher in rates. ECB President Mario Draghi announced the plan to offer lenders unlimited funds for three years after the central bank’s policy meeting on Dec. 8. The result has Spanish and Italian notes better today, leading gains in euro-area debt, on speculation banks bought the securities to use as collateral when the European Central Bank starts offering three-year loans next week.

The bellwether 10 yr yield at 1.88% is 2 bp frm its recent low yield this morning. Mortgages just sitting with no change yesterday and so far this morning. In past moves when the 10 yr traded below 2.00% it lasted just three days before it moved back over 2.00%. This time down may last longer as investors begin to wind down for the year; with Europe a constant ticking bomb investors and traders are not likely to back off treasuries much. Technically the bond market is still holding a bullish bias, mortgage markets slightly so but still in decent shape technically. With the weekend here today is likely to be quiet with narrow ranges.