Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1391.7	-5.3	-0.38%
Eurostoxx Index	2418.3	-21.9	-0.90%
Oil (WTI)	93.16	-0.5	-0.54%
LIBOR	0.437	-0.001	-0.25%
US Dollar Index (DXY)	82.46	0.247	0.30%
10 Year Govt Bond Yield	1.62%	-0.01%
RPX Composite Real Estate Index	188.8	0.3

Markets are weaker this morning on disappointing economic data out of Europe and earnings misses from Disney, McDonalds, and Priceline. Euro sovereign yields are generally lower and the yield on the German two-year remained negative for the 24th consecutive day. US bond yields are slightly lower, and MBS are up a few ticks.

We have had dueling Fedspeak recently, with the head of FRB Boston advocating further QE yesterday and Dallas Fed Head Fisher claiming the Fed has done its job and no more needs to be done. IMO, the Sep and October meetings will be too close to the election to expect much, if anything in the way of policy changes. The Fed is very sensitive to appearing to act politically and usually sits on its hands in the last few months before an election (2008 notwithstanding).

In economic data, mortgage applications dropped 1.8% last week.  Productivity was a little better than expected, and unit labor costs increased markedly, with a big upward revision in Q1.  Declining profitability and increasing unit labor costs are not a recipe for increased hiring in the near term.

Is the ECB's version of QE actually increasing the risk of a crisis in Spain and Italy? It may in fact be doing so. By announcing a plan to buy short-term debt from Spain and Italy, it is encouraging these countries to issue more short term paper, which increases their roll-over risk. (Roll-over risk is what happens when you aren't able to refinance maturing short-term debt).

Corelogic reported a 2.5% annual increase in home prices during the month of June.  Ex-distressed sales, prices increased 3.2%. They are calling the bottom:  "At the halfway point, 2012 is increasingly looking like the year that the residential housing market may have turned the corner. While first-half gains have given way to second-half declines in the past three years, we see encouraging signs that modest price gains are supportable across the country in the second half of 2012." It is true that some of the recent home appreciation has been due to seasonal factors. but there seem to be other factors at work too - most notably a red-hot rental market. FWIW, Radar Logic (which manages the RPX index) thinks it is all a head fake.

Yet another positive data point for housing - North American rail carloads of lumber increased 10% this year as housing construction rebounds. Housing starts are still way below historical averages and have been there since the end of 2006, so a rebound in starts is nothing to get too excited about. But every little bit helps.

Texas Instruments just issued 7 year paper at 1.65%. After tax, that cost is 1.24%. TXN's dividend yield is 2.33%.  Is there an arbitrage here?  Is that what is getting the stock market excited?  Food for thought...