There was a larger than expected slowdown in 1st quarter growth, but the Fed believes those effects will prove "transitory" assuming continued improvement in household balance sheets, easing credit conditions, and strengthening labor markets. The economy appears to be gaining enough traction to support a MODEST recovery, but remains highly sensitive to a number of variables including a larger-than-expected drag on household and business spending from higher energy prices, continued fiscal strains in Europe, larger-than-anticipated effects from supply disruptions in the aftermath of the disaster in Japan, continuing fiscal adjustments at all levels of government in the United States, financial disruptions that would be associated with a failure to increase the federal debt limit, and the possibility that the economic weakness in the first quarter was signaling less underlying momentum going forward. If the variables listed above do not slow the pace of economic expansion and growth resumes as anticipated in the second half of 2012, the Fed will likely be forced to begin the exit process from extremely accommodative policy. In preparation for such a scenario, the Fed economic staff gave a presentation on strategies for normalizing the stance and conduct of monetary policy over time as the economy strengthens. This does not mean the move toward such normalization would necessarily begin soon, but it does describe the steps the Fed will take toward tightening in the context of the economic outlook and the Committee's policy objectives.

As is more often the case for Thursdays than any other day of the week, tomorrow's calendar is thick with a variety of economic events. As always, you can get a detailed view of those with the link at the bottom of this update. Here's a snapshot: In terms of scheduled economic reports, Jobless Claims is the sole occupant of the 830am time slot. After that, there's a 10am triple-team with Existing Home Sales, Philly Fed Survey, and LEI. Of those, we'd tend to be most interested in Philly Fed although Tuesday's Housing Starts did illicit a bit of a market reaction, so perhaps tomorrow's Home Sales data will emulate. Whatever the case, 10am is packed. Fed speakers appear throughout the day as well with Dudley at 830am, Dudley at noon (yes, again), and Evans at 140pm. Also, though it's not nearly the same sort of market mover as a pure 10yr TSY note auction, there will be a 10yr TIPS auction tomorrow at 1pm which has a bit of market moving potential on occasion. 2 hours earlier, the next round of TSY supply is announced, though there isn't as much speculation of a reduction in offering sizes as there was 2 weeks ago.

Here is an excerpt from the FOMC Minutes discussing the state of the U.S. housing market: "Activity in the housing market remained very weak, as the large overhang of foreclosed and distressed properties continued to restrain new construction. Starts and permits of new single-family homes inched down, on net, in February and March, and they have been essentially flat since around the middle of last year. Demand for housing also continued to be depressed. Sales of new and existing homes moved lower, on net, in February and March, while measures of home prices slid further in February. Rates on conforming fixed-rate residential mortgages rose modestly during the intermeeting period, and their spreads relative to 10-year Treasury yields narrowed slightly. Mortgage refinancing activity remained near its lowest level in more than two years. The Treasury Department's announcement in late March that it would begin selling its holdings of agency MBS at a gradual pace had little lasting effect on MBS spreads. The Federal Reserve began competitive sales of the non-agency residential MBS held by Maiden Lane II LLC; initial sales met with strong demand, but market prices of non-agency residential MBS were reportedly little changed overall. The rates of serious delinquencies for subprime and prime mortgages were nearly unchanged but remained at elevated levels. However, the rate of new delinquencies on prime mortgages declined further."

Despite MBS having fallen more than enough to justify reprices for the worse, that hasn't been a widespread phenomenon as yet. That's not to say that they're not on the way, simply that lenders appear to be absorbing a higher than average amount of price losses in MBS. To quantify the weakness, FNCL 4.5's are down 8 ticks at 103-08 and 10yr note yields are up just over 6 bps on the day at 3.173.

WASHINGTON – The Consumer Financial Protection Bureau (CFPB) today announced the Know Before You Owe project, an effort to combine two federally required mortgage disclosures into a single, simpler form that makes the costs and risks of the loan clear and allows consumers to comparison shop for the best offer. Tomorrow, the CFPB will begin testing two alternate prototype forms that are designed to be given to consumers who have just applied for a mortgage loan. This testing – which will take place over the next several months and involve one-on-one interviews with consumers, lenders, and brokers. To view the combined forms and share feedback, check out this post: http://www.mortgagenewsdaily.com/05182011_gfe_til_combined.asp

With just over 40 minutes to go until the FOMC Minutes, a persistently bullish stock market is coinciding with persistent weakness for bond markets. It all speaks to the on again, off again possibility/fear that the current pace of the economic recovery is overdone. Traders may find clues that could help in deciding that in the upcoming FOMC Minutes. FNCL 4.5's are currently down 4 ticks on the day at 103-13 and 10yr notes are 4.6 bps higher in yield at 3.1599 near their weakest levels of the day. Several reprices for the worse have been reported since last update, and that risk remains for lenders who have not yet released one.

FNCL 4.5's have hit their lows for the 4th time today, down 6 ticks at 103-10. 10yr benchmarks just broke through their supportive ceiling at their highest yields of the day moving from 3.153 to 3.156. Reprices for the worse have been seen, and any lender that hasn't put one out yet is a risk, though the earlier rate sheets more so.

With the exception of 1 hour so far this morning, profit taking has been the order of the day, meaning that accounts are selling open fixed income positions, bringing prices lower and yields higher. The pace has been aggressive relative to recent instances of profit taking and without new short positions coming into the market, the selling pressure seems as if it has run its course for the morning. That leaves 10yr yields having bounced around 3.15 and stabilizing around 3.145. FNCL 4.5 MBS are down 4 ticks on the day at 101-12, the level that had previously served as 2011's bullish resistance (much like 3.14 had been in the 2011 resistance zone for 10yr notes). Best case scenario, if the rally continues, these could both turn out to look like great pivot points for the next leg lower in yield. But we wouldn't make any bets on that happening today unless the post-FOMC-Minutes trading is bond-bullish. With MBS near their lows of the day, we're still at risk of reprices for the worse, though with slightly less certainty than if we had moved straight down through the 103-12 zone.