Mortgage backed securities (MBS) prices are lower (rates higher) after yesterday's substantial gains due to an enormously strong 7yr note auction that drew higher demand from indirect bidders (foreign central banks) than in previous auctions; FNMA 5.0% coupon 101.89bps, -3bps. Expectations that the Fed will keep interest rates low have increased; traders now see a 46% chance of a rate hike in 2009, down from about 90% a week ago. Personal income surged 1.4%in May, more than expected, though nearly all the gain is related to temporary fiscal stimulus. Almost 50 million people received a one time payment of $250 from the American Recovery and Reinvestment Act of 2009 (thanks Barak), bolstering the consumer sector. The result is not exactly what was hoped for as the loss of household wealth caused by the housing slump promted people to rebuild their savings. The savings rate has reached a 15 year high, 6.9%, indicating the economic recovery will be slow to develop. Wages and salaries actually dropped 0.1% in May, showing the effects of mounting job losses. Consumer spending rose for the first time in three months, up 0.3%, and a sign that efforts to revive the economy may be starting to pay off. Consumer Sentiment showed a slight improvement, up 1.8 to 70.8, after rising 4 in May and 8 in April. Expectations have stalled and often point to the future direction of the index. The current condition component is improving and hopefully reflects an uptick in the labor market as the decline in housing and manufacturing slows. Requests for business loans, commercial and industrial, have fallen even as deposits have grown. Banks are using the deposits to buy bonds instead of making loans, looking to the debt market during the economic slowdown by investing in tradeable securities with the least credit risk, while waiting for interest rates and loan demand to increase. Bank purchases have helped suppress mortgage rates by supporting the price of MBS. Net income for lenders dropped 61% this year as they add to reserves, took charges from bad loans and collect less money from packaging and selling loans. Be wary today of a sell off as it is a Friday after a strong run up in prices.