China/commodities/note auction/mortgage rates, oh boy!

With rising expectations of a widening of the Chinese Yuan band, the Yuan rose to the highest level since Oct ’09 vs the US$ and China said they are going to sell a 3 yr note tomorrow to extract liquidity from the banking system. In response, the Shanghai index was the only stock market in Asia to trade lower as policy may be set to tighten again to cool inflation. The Journal of Commerce index of 18 industrial materials yesterday hit its highest level since Aug ’08 and is just 11% from an all time high dating back to ’85. The FOMC in their minutes said there is little inflation pressure but this rise in material prices has to be eaten by someone. The commodity inflation backdrop along with the better economic data and signs of the market choking on supply sets us up for the 10 yr note auction today which will likely be the most focused on sale the Treasury has made in a while. Bernanke will speak at 1:30pm on the ‘Economic Challenges.’

In the first sign that higher rates are having an impact on one section of the economy, the MBA said refi’s fell 16.9% to the lowest level since early Jan and is down for 5 straight weeks in response to the average 30 yr mortgage rate rising to 5.31%, the highest since Aug ’09. Purchases though rose a touch, by .2% ahead of the expiration of the home buying tax credit on April 30th. ABC confidence rose 2 pts to -43. Investors Intelligence said Bulls rose to 48.9 from 48.3 and Bears fell to 18.9 from 19.1, both are back to levels last seen on Jan 20th. Greek bonds are selling off again and their 10 yr yield is back above 7% at 7.08%, just a few bps from its panic Jan high. Greek stocks are down 2% and the euro is lower again too.

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