In addition to the pervasive belief that the end of QE2 will pose challenges for stock and commodities markets, a recent Reuters poll shows that most economists think bond markets will suffer as well. Of the 64 respondents to the poll, 40 predicted 10yr yields would move higher in the second half of the year, while only 7 thought rates would move lower. The remaining 17 said there would be no impact. The S&P index was seen lower by 28 respondents, with 14 predicting higher stock prices. 20 respondents saw no impact.

(Reuters) - The delinquency rate for U.S. mortgages payments significantly overdue fell sharply in the first quarter, reaching the lowest level since early 2009, an industry group showed on Thursday. The U.S. Mortgage Bankers Association said in the first quarter of 2011, the percent of loans that were seriously delinquent was 8.10 percent, 50 basis points lower than the fourth quarter of 2010 and 144 basis points lower than a year ago. It was the fifth straight quarter that showed declines in the seriously delinquent rate. The improvement is a significant positive for the housing market, which continues to lag improvement seen in other sectors of the U.S. economy. Loans that are seriously delinquent pose the greatest risk to the housing market as they are the most vulnerable to foreclosures. Jay Brinkmann, the MBA's chief economist, said the drop in serious delinquencies was driven by an improving U.S. economy and jobs market. "Most of these numbers from the first quarter point to a mortgage market on the mend," he said. Brinkmann said if the economy and jobs market continues to improve the 90-day delinquency rate should continue to head lower. "Everything hinges on the number of paychecks," he said. Foreclosure starts, meanwhile, were at the lowest level since the end of 2008 and had the second largest drop ever. The non-seasonally adjusted foreclosure inventory rate for all loans at the end of the first quarter of 2011 was 4.52 percent, 12 basis points lower than the fourth quarter 2010 rate of 4.64 percent and 11 basis points lower than the first quarter 2010 rate of 4.63 percent, the MBA said in its Q1 National Delinquency Survey.

WASHINGTON, May 19 (Reuters) - A key gauge of future U.S. economic activity dropped for the first time in nearly a year in April, the Conference Board said on Thursday about its measure of leading indicators. The Leading Economic Index slipped 0.3 percent in the first decline since June 2010, the independent business and research group said. Economists polled by Reuters had expected it to rise 0.1 percent. "The economy has been growing moderately and delivering some new jobs," said Conference Board Economist Ken Goldstein in a statement. "Economic growth will likely continue through the summer and fall, but the pace of economic activity may be choppy." Meanwhile, the index's March increase was revised up -- to 0.7 percent from the previously reported 0.4 percent. The Conference Board's Coincident Economic Index rose 0.1 percent in April, following a 0.2 percent increase in March. Its Lagging Economic Index also rose in April, 0.5 percent, after increasing 0.3 percent in March. (Reporting by Lisa Lambert, Editing by Chizu Nomiyama)

April Existing Home Sales fell 0.8 pct to a 5.05 mln annual rate from 5.09 mln in March. Economists expected a 2.0 pct rise to 5.2 mln. Inventory increased 9.9 pct to 3.87 mln units which constitutes a 9.2 month supply. Year over year, Median Home Prices are down 5 pct at 163,700, although this figure has risen in the course of recent reports. The share of distressed sales fell from 40 pct last month to 37 pct in the current report.

Of the three economic reports that came out at 10am, we looked to the Philly Fed Index as the most economically significant. The headline index fell to 3.9, much weaker than the 20.0 consensus. New Orders dropped to 5.4 from 18.8 last month and Prices Paid even ticked down from 57.1 to 48.3. Six Month Business Conditions fell from 33.6 to 16.6. The only positive component of the report was the 22.1 reading in the employment index versus 12.3 in the previous month. On this economically bearish data, bond markets have been able to turn a corner and the 10yr note is shying away from it's 3.23/24 support levels, back now to 3.2171. Meanwhile, FNCL 4.5 MBS are a few ticks better, now down only 2 on the day at 103-05+. We're not in "reprice for the better" territory by any means, but it's a step in the right direction.

* Fed's Dudley-dollar fluctuates, not that far off where it was pre-crisis today * QE was not expected to be a panacea, but it has made financial conditions more accomodative * QE2 did more good than harm, a reason seeing more job growth now than last summer *Seeing very little in way of wage gains due to weakness in labor market *Regardless of what happens with federal budget, FED will do its job of keeping inflation in check * Would not be in favor of return to gold standard.

(Reuters) - New York Federal Reserve Bank President William Dudley told students in New Paltz, New York that unemployment still remains "unacceptably high" and most measures of underlying inflation trends remain below the Fed's comfort zone. "The recovery remains moderate and we still have a considerable way to go," said Dudley, who is seen as one of the more dovish Fed officials. Dudley said a weaker-than-expected economic performance in the first quarter "probably will prove temporary." He noted, for example, a better jobs picture. "The labor market has shown further improvement," he said. The U.S. economy added 244,000 jobs in April, according to the government's closely watched non-farm payrolls report. "I am hopeful that job growth will continue to strengthen in coming months." Dudley also pointed to signals of manufacturing growth and improving financial conditions as well as fiscal measures that are supporting demand in the United States. He added that that demand from overseas remains robust, supporting U.S. exports. He said manufacturing production fell in April largely because of supply disruptions associated with the earthquake in Japan. Dudley said headline inflation has risen somewhat above the Fed's desired level and that commodity price increases over the past year probably will push it up further in the next few months. But, he added, he expects this to be temporary as commodity prices -- which have dropped recently -- either stabilize or fall further. (Reporting by Kristina Cooke, Editing by Chizu Nomiyama)

Ahead of the 10am data, 10yr notes have risen in yield about as high as they've been since May 4th. 3.23 to 3.24 has seen supportive "bounces" 5 times so far this month, and today is currently in the process of deciding if it will join that list or if the range will break. Even if things get worse over the next 20 minutes, it's a decent possibility that the actual TEST of these range limits will be confirmed or rejected by the data that hits at 10am. FNCL 4.5's are also at their weakest levels of the day, down 6 ticks at 103-02.

Production MBS coupons have added to yesterday's price losses after a better than expected jobless claims report at 830am. Rate sheets will be notably worse as a result. If you're floating aggressive loan pricing (4.625% C30 or 4.375% FHA), you are at risk of losing those below market quotes.

It's off to the races so far this morning as MBS and TSYs race away from yesterday's trading range. Jobless claims may still be showing an increase in the moving average and continuing claims may still be over 3.7 mil, but the market sees the better-than-expected headline like this: "hey! maybe that's the downtick we've been looking for!" In other words, it's a chance for moving averages and continuing claims to make positive progress... FNCL 4.5's are down 5 ticks so far this AM at 103-03 while 10yr notes are nearly 4 bps higher at 3.226. This is a VERY important range for 10yr yields as it's near 3.23 that we've seen a majority of supportive bounces for the recent range. So there's the silver lining.... We may be looking at a red morning, but if 3.23/24 or something close to it holds as support, it'll show that the bond market isn't too quick to give up it's recently gained territory. That is, of course, unless the next set of economic data gets a similar reaction to Jobless Claims... That's coming up in just over an hour.

While the headline Jobless Claims at 409k is lower than the consensus estimate of 420k as well as last week's 438k, the 4 week moving average continued to rise. After ticking up in early April, the moving average has been higher every week since. Continuing Claims fell to 3.711 mln versus a consensus of 3.72 mln. It's still too early to say there's a significant movement in continuing claims as they've been over 3.7 mln in most of the recent reports.