Stocks rallied on this news and bond prices moved deeper into the red. (Reuters) - U.S. wholesale inventories rose less than expected in April, held back by the biggest drop in auto inventories since December 2009, a Commerce Department report showed on Thursday. Inventories rose 0.8 percent to $447.2 billion in the first month of the second quarter, below economists' forecasts for a 1.0 percent rise. Automotive inventories, one of the biggest categories, fell 1.3 percent. Sales rose to $393.5 billion, the highest since June 2008. But the 0.3 percent month-to-month rise was much less than the 1.2 percent gain analysts had forecast. A 0.9 percent rise in both auto and computer sales was offset by bigger declines in categories such furniture, lumber, professional equipment and metals. The inventory to sales ratio rose slightly to 1.14. (Reporting by Doug Palmer, Editing by Andrea Ricci)

Although stocks have added little momentum to intraday strength, benchmark Treasuries are testing their highest yields of the day and "rate sheet influential" MBS prices are setting new session lows. The Fannie Mae 4.0 MBS coupon is currently -6/32 at 101-09. This is poor timing as many lock desks are taking down their MBS indications to generate rate sheets. Loan pricing will surely deteriorate as a result. 10AM data is just ahead, we will alert if conditions improve.

(WSJ) - Even the National Association of Home Builders’ top economist is sounding a bit gloomy these days. David Crowe, the trade group’s chief economist has lowered his forecast for home construction this year. Builders are likely to break ground on 582,000 homes this year, down slightly from 2010 and a far cry from a peak of more than 2 million in 2005, Mr. Crowe said Wednesday. He also forecasts that builders will start construction on only 431,000 single family homes this year—the lowest level of the housing bust. In an interview, Mr. Crowe said the start of the year was “much worse than I expected,” noting that overall economic growth was weak, the labor market grew less than forecast and consumer confidence hasn’t picked up. High gasoline prices, he said, are “just a joy-killer” that makes consumers less interested in purchasing a new home. Back in January, Mr. Crowe expected a much healthier rebound. At the time, he was forecasting builders would start construction on 575,000 single-family homes this year. The housing market has been a consistent source of weakness for the U.S. economy, and builders have been hit hard. U.S. home prices fell 4.2% in the first quarter of 2011, a new post-bubble low, according to the S&P/Case-Shiller home-price index released last week. Mr. Crowe forecasts that 320,000 new homes will be sold this year, just below last year’s levels.(Alan Zibel) http://blogs.wsj.com/developments/2011/06/08/builders-economist-lowers-housing-outlook/

(Reuters) - The U.S. trade deficit narrowed unexpectedly in April, as U.S. exports rose to a new record and imports from Japan tumbled more than 25 percent in the aftermath of its earthquake, tsunami and nuclear disaster, a U.S. government report showed on Thursday. The monthly trade gap totaled $43.7 billion, down 6.7 percent from a revised estimate of $46.8 billion in March which was originally reported as $48.2 billion, the Commerce Department said. Wall Street analysts surveyed before the report had expected the April trade gap to widen to $48.8 billion. The $3 billion drop in imports from Japan from March to April was the largest on record. U.S. auto and auto parts imports from Japan and other suppliers fell $2.8 billion, partly reflecting supply chain disruptions in the aftermath of the triple disaster. The narrower-than-expected deficit should be positive for second-quarter U.S. economic growth and follows a spate of other recent data that have raised concern about the strength of the U.S. economic recovery. The trade gap narrowed despite the biggest month-to-month jump in prices for imported oil in nearly three years. The average price rose to $103.18 per barrel, the highest since September 2008. However, the volume of crude oil imports fell, pushing the overall U.S. oil import bill lower in April. That, combined with the lower imports from Japan, helped trim total U.S. imports 0.4 percent to $219.2 billion, even as imports of foods, feeds and beverages set a record, the report showed. U.S. exports, buoyed by a weakening of the U.S. dollar, rose 1.3 percent to a record $175.6 billion, led by record shipments of industrial supplies and materials and capital goods and smaller gains for food, feeds and beverages, consumer goods and autos and auto parts. The closely watched U.S. trade deficit with China jumped nearly 20 percent in April to $21.6 billion. It continues at a pace to exceed last year's record of about $273 billion.

(Reuters) - The number of Americans filing new claims for unemployment benefits unexpectedly rose last week, according to a report on Thursday that could reinforce fears the labor market recovery has stalled. Initial claims for state jobless benefits increased 1,000 to 427,000, the Labor Department said. However, economists polled by Reuters had forecast claims dropping to 415,000 from a previously reported count of 422,000. The rise kept first-time claims perched above the 400,000 mark for the ninth week in a row. Analysts normally associate a level below that with steady job growth. Fueling concerns about job creation, the U.S. government said on Friday the U.S. unemployment rate ticked up to 9.1 percent in May while nonfarm employers added a paltry 54,000 workers to their payrolls. The number of people still receiving benefits under regular state programs after an initial week of aid slipped to 3.68 million in the week ended May 28 from 3.75 million. Economists had expected so-called continuing claims to edge down to 3.70 million from the previously reported 3.71 million. (Reporting by Lisa Lambert, Editing by Neil Stempleman)

Unexpectedly strong trade balance data sent a knee jerk shock wave through the bond market at 8:30am but rates are recovering from their brief blip and the early morning rally is extending. The U.S. trade deficit narrowed unexpectedly in April, as U.S. exports rose to a new record and imports from Japan tumbled more than 25 percent in the aftermath of its earthquake, tsunami and nuclear disaster. The 10-year note yield jumped 2bps to 2.953% on the news but has since fallen back down to 2.933%. In unison with benchmark guidance givers, production MBS coupon prices declined quickly as the news crossed wires, but prices have since corrected. The Fannie Mae 30-year MBS coupon is flat on the day at 101-16. With the next report due out a 10am, we'd expect rates and MBS to take their cues from the stock lever. S&P futures are currently +4.00 (+0.33%) at 1281. While these intraday gains seem exciting for equity watchers, stocks are really just hovering around 3-month lows. Furthermore, stocks have already failed to hold onto intraday gains twice this week, which indicates an underlying bearish tone is present in S&Ps. Still, we must remain wary of this behavior as interest rate profit takers are looking for any reason to count their chips before the 30-year bond auction at 1pm. It could be a choppy morning. Right now rate sheets look like they'll be unchanged to slightly worse. We will alert if conditions deteriorate.

Benchmark Treasuries traded a bit weaker in the overnight session but are gaining strength ahead of U.S. econ data and a 30-year bond auction. The 10-year Treasury note yield is down another two basis points to 2.928% - its lowest level in 2011 - after closing at 2.949% Wednesday. The 30-year Treasury is down 2 basis points to 4.165%. By contrast, the two year yield is up two basis points to 0.401%. While mortgages are lagging benchmarks, MBS prices are in the green. The Fannie Mae 4.0 coupon is currently +2/32 at 101-17. Stocks seem to be doing better based on their day over day change, but the reality is equities are hovering around the week's worst levels and 3-month lows. The S&P 500 looks to open 4.5 points higher at 1,281.25, a pretty modest gain relative to more than five weeks of straight losses, including the past six sessions. The Dow is poised to open 42 points higher at 12,060. "The S&P 500 has now fallen in six consecutive sessions, the longest losing streak since the depths of the financial crisis, though the damage to this point has still been a relatively modest 6.2% from the late-April high," said economists at BMO Capital Markets. Global markets have been mixed. The ongoing session in Europe has the FTSE 100 and CAC-40 up by less than 0.1% apiece, while in Asia shares in Japan and Hong Kong were relatively flat. The outlier was China: the Shanghai Composite snapped a three-day streak and tumbled 1.7% on concerns of further government tightening. "Analysts said the Shanghai index may consolidate in the current range in the next few sessions as investors will move cautiously ahead of China's May macroeconomic data, which are scheduled to be issued next week," reported Dow Jones newswires. Light crude oil is 0.69% higher at $101.46 per barrel, while gold is trading 0.14% downwards at $1,536.60 per barrel.