Market Update

FNMA 30-YR 4.5%

Previous close 100.780
Opened Down 0.06bp @ 100.719

Key Economic Data:

EUR / USD 1.3522 Up 0.0033
USD / JPY 83.7950 Up 0.4703
GBP / USD 1.6157 Up 0.0119

OIL 85.30 Up 0.49
Gold 1,372.10 Up 7.00

Key Economic News:

Soft Sales, Due to Weather; Empire Index and Import Prices Both Firm
A weaker than expected retail sales report, mainly due to downward revisions to Nov and Dec. Weather clearly a factor in recent months as non-store retailers outperform relative to recent differentials. Empire index shows further gains in manufacturing in New York State while import prices surge in reaction to commodity price pressures.

KEY NUMBERS:
Retail sales +0.3% in Jan (mom, +7.1% yoy) vs. median forecast +0.5%.
Ex autos +0.3% in Jan (mom, +5.4% yoy) vs. median forecast +0.5%.
Import prices +1.5% in Jan (mom, % yoy) vs. median forecast +0.8%.
Empire index 15.43 in Feb vs. median forecast +15.

MAIN POINTS:
1. Retail sales rose less than expected in January, although the core component-sales ex autos, building materials, and gasoline-was in line with the consensus view (+0.4%) and just a touch less than we had thought (about ½%). However, data for November and December were revised down 0.2% and an additional 0.3%, respectively. We expect a small downward adjustment to the consumption component of the fourth-quarter real GDP growth rate (currently 4.4% at an annual rate for consumption) and see the tracking into the first quarter for purchases of goods at just over half the fourth quarter (nominal) 6.6% annual rate.

2. The report provides clear evidence of weather effects over the past three months in retail spending, as non-store retailers posted gains of 1.5%, 2.6%, and 1.2% for November, December and January, respectively. While this category is trending higher than the total as more Americans shop from the comfort of home, this three-month increase of 5.4% (not annualized) versus a paltry 0.9% for core sales is a much bigger difference than the difference in year-to-year trends (13.4% vs. 4.3%).

3. The Empire index rises from 11.92 in January to 15.43 in February. New orders remain broadly unchanged (down round half a point to 11.8) but shipments decline (by around 14 points to 11.31). The index for employees falls (by almost 5 points to 3.61) but the index for inventories rises (by almost 5 points to 9.64). The index for prices paid rises 10 points to 45.78.

4. Import prices rose 1.5% month-on-month in January (5.3% yoy), with increases across a variety of commodity-related categories: prices for "industrial supplies" rose 3.3% on the month, while foods and beverages were up 2.6%, and petroleum 3.4%. Categories dominated by manufactured goods, including capital goods and consumer goods, showed much lower inflation (+0.1% and +0.3% respectively).

10:00: Housing market index for Feb….still at a very low level? This index continues to hang in the mid teens, where it has been for most of the past three years. Nobody expects much of a change this month.

Median forecast (of 47): 16, ranging from 15 to 18; last 16.

10:00: Business inventories for Dec…did retail remain flat? The median forecast of a 0.7% increase implies no change in retail inventories given what has already been reported for manufacturing (+1.1%) and wholesale (+1.0%).

Median forecast (of 51): +0.7%, ranging from +0.2% to +1.0%; last +0.2%.

13:00: Treasury Secretary Timothy Geithner testifies on the administration's FY 2012 budget…before the House Ways and Means Committee.

14:00: OMB Director Jacob Lew testifies on the administration's FY 2012 budget…before the Senate Budget Committee.

17:00: ABC consumer comfort index…can't seem to hold those gains. This index fell back to -46 in the first week of February from a comparatively high -41 in the last week of January. Its nearly 3-year range is -54 to -40.