Europe continues to control US markets; yesterday there was a passing thought that Italy's debt problems would deal a serious blow to the country with its interest rates at record highs since the EU began. Yesterday another passing thought that the EU would eventually be restructured based on comments from French Pres Sarkozy that a two tier EU may be the best thing eventually. Yesterday the stock market dropped 389 points, the 10 yr note yield fell 12 basis points to close under 2.00% at 1.96%. That was yesterday; like it has been the last few weeks, one day its doom and gloom, the next not as bad. No one actually knows what will happen tomorrow; therein lies the difficulty in attempting to assess the situation on a day to day basis.

Yesterday there were comments from supposed knowledgeable people that the ECB was precluded from buying bonds from individual EU countries; obviously that isn't the case. We reported it as fact and one reason that the debt problems in the region were unlikely to be resolved for years and that there would be defaults in a number of countries. Overnight reports from the wires saying the ECB was in buying Italian bonds, so far no confirmation from the central bank. Italy did sell bills today, the demand was strong and for the moment markets are less concerned that Italy can not fund itself. The country sold 5 billion euros ($6.8B) of one-year bills at an average yield of 6.087% after yields yesterday on 10-year notes surged past the 7 percent level.

In Greece there is apparently a new leader that will form an interim government; former vice- president of the European Central Bank Lucas Papademos will head a national unity government for Greece, according to the country's presidency.

At 8:30 this morning weekly jobless claims along with the every other day optimism about Europe driving stock indexes higher and interest rate prices lower. Weekly claims fell 10K to 390K the lowest claims in 7 months, expectations were fro unchanged at 400K; continuing claims also fell, from 3.707 mil to 3.615 mil.

Sept US trade balance declined to -$43.11B, if here is any consensus in the markets these days the forecast was for the balance to -$46.3B. Oct import prices fell 0.6% against estimates of -0.2%; export prices fell 2.1%.

At 1:00 this afternoon Treasury will complete borrowing $72B this week with $16B of 30 yr bonds. The 10 yr auction yesterday was weaker than traders were expecting, sending rates higher on the reaction before regaining strength into the close with the 10 at 1.96%. This morning the 10 yr is hovering at 2.05%.

At 9:30 the DJIA opened +126, NASDAQ +30, and the S&P +13; the 10 yr note 2.05% +9 bp and mortgage prices down 8/32 (.25 bp).

Attempting to trade on fundamentals these days is almost impossible with the constant changes happening in Europe. Looking solely at the technicals, the 10 yr note presently is sitting right on its 40 day average at 2.05% with its 20 day average at 2.09%. 30 yr FNMA MBS today trading below its 40 day and at the moment holding at its 20 day, similar to the 10 yr note. The relative strength in both markets is hanging at neutral. The overall technical picture slightly positive but not by much. That the 10 yr this morning is back over 2.00% somewhat negates its close yesterday below 2.00%. With US markets being completely dominated by what happens in Europe the outlook for US interest rates is in the end is impossible to anticipate. Bottom line; markets are adrift in a sea of uncertainty over Europe and the impact on the US economy.