Mortgage backed securities (MBS) prices are falling (rates rising) as equity markets surge on positive signs that the recession may be abating, reducing demand of fixed income assets, like MBS, and stoking concern inflation could increase; FNMA 4.5% coupon 100.06bps, -80bps. The DOW is up 175pts (2%) after release of economic reports reinforcing beliefs that the economy may be bottoming. Personal Income unexpectedly jumped 0.5% in April, largely due to increased government social benefit payments reflecting provisions of the American Recovery and Reinvestment act of 2009. Consumer Spending continued to fall, down 0.1% as concern over rising unemployment and record wealth destruction prompted households to boost savings rates in April to the highest level since 1995. The ISM Manufacturing Index moved higher, from 40.1 in April to 42.8 in May, and above the 41.2 threshold the ISM associates with a shrinking economy. The biggest news in the report is new orders rising above 50 for the first time in 17 months. Also significant is a big decline in inventories, suggesting the correction is complete, and that a build in inventories wil be necessary to meet production needs. Construction Spending unexpectedly surged 0.8% in April, led by a 1.8% increase in private non-residential outlays and a 0.7% jump in private residential spending. The Fed's program of purchasing MBS and Treasuries, to keep low mortgage rates so people can refinance to reduce payments and stay in their homes, have enabled 2 million homeowners to refinance who otherwise would not have been able to. To illustrate the negative impact of the recent rise in rates, at 5.25% 43% of borrowers can benefit from refinancing, while at 4.75% 87% of borrowers will benefit. That was half the pool being emptied.