(Reuters) - The percentage of empty privately owned U.S. homes and rental units eased in the second quarter, a government report showed on Friday. The homeowner vacancy rate slipped to 2.5 percent from 2.6 percent in the April-June period, the Commerce Department said. Rental vacancies fell to 9.2 percent from 9.7 percent. (Reporting by Mark Felsenthal; Editing by James Dalgleish)

In a few minutes, Obama will make a statement on the status of the debt ceiling negotiations. Ahead of that potentially market moving event, bond markets are about as strong as they've been in 2011 with 10yr yields at 2.856 (they've dipped slightly lower on a few brief occasions in the past, but lowest closing yield - 2.86+). MBS Still lag Treasuries into the rally, but each of them have ratcheted to better and better territory following each piece of economic data. Fannie 4.0 MBS are up half a point on the day at 101-09 currently. Rate sheets should be stronger this morning, obviously, but lenders are likely to remain conservative while volatility remains elevated.

(Reuters) - U.S. consumer sentiment fell in July to its lowest point in more than two years, as anxieties over stagnant wages and rising unemployment deepened, a survey released on Friday showed. Concerns about the U.S. debt crisis also loomed large, as lawmakers in Washington continue to wrangle over plans to raise the debt ceiling before the U.S. government runs out of money to pay its bills on Tuesday. The Thomson Reuters/University of Michigan's final reading on the overall index of consumer sentiment came in at 63.7, down from 71.5 in June, the lowest reading since March, 2009. That is just below the preliminary July figure of 63.8 and the median forecast of 64.0 among economists polled by Reuters. "While consumers may not fully understand the debate about the federal debt, they do understand the meaning of the oft repeated warnings of 'dire economic consequences,'" Director Richard Curtin said in a statement. Confidence in government economic policies reached a new low under the Obama administration. The survey's gauge of consumer expectations slipped to 56.0, on par with economists' predictions but below June's 64.8. Curtin added that the expectations index is at levels consistent with recession, but has not been down long enough to signal one definitively. The survey's barometer of current economic conditions was 75.8 in July, down from 82.0 in June, and below a forecast of 76.3. Just one in ten consumers expected to earn more money in the year ahead and twice as many consumers reported hearing about new job losses compared with job gains in July. "The absence of positive long term financial expectations has turned consumer resilience into consumer fragility at the first sign of adversity," Curtin said. (Reporting by Alex Alper, Editing by Chizu Nomiyama)

(Reuters) - Here is what is happening on Friday as lawmakers scramble to close in on a deal for Congress to raise the U.S. government's $14.3 trillion borrowing limit by an Aug. 2 deadline and avoid a debt default: * President Barack Obama is to make a statement on the debt limit situation in Congress at 10:20 a.m. EDT. (1420 GMT) * After Republican House of Representatives leaders failed Thursday to muster sufficient support for Speaker John Boehner's proposal to raise the ceiling, they labored through Thursday night to rework the bill in hopes of winning over a few Republican holdouts. So far Democrats stand united against the Boehner plan. A House vote on the new plan could be scheduled for later Friday, at the earliest. * House Republicans are set to meet behind closed doors at 10:00 a.m. EDT (1400 GMT) to discuss the reworked Boehner plan. * At least one House Republican holdout, Representative Trey Gowdy in a CNN television interview predicted the new Boehner plan will pass the House. * A White House official says Obama remains opposed to any short-term debt limit hike as sought by House Republicans. * The U.S. Treasury is preparing an emergency plan for how the government would function and pay its obligations if Congress fails to raise the government's borrowing authority. The plan could be released as early as Friday, officials say.

Reuters) - Business activity in the U.S. Midwest grew less than expected this month as the labor market weakened, a report showed on Friday. The Institute for Supply Management-Chicago business barometer dropped to 58.8 in July. The reading was 61.1 in June, and economists had forecast a July reading of 60. The employment component of the index sank to 51.5, from 58.7 in June. New orders also fell, to 59.4, from 61.2. A reading above 50 indicates expansion in the regional economy. (Reporting by Ann Saphir; Editing by James Dalgleish)

Reuters) - The economy grew less than expected in the second quarter as consumer spending barely rose amid higher gasoline prices, and growth braked sharply in the prior quarter, a government report showed on Friday. Growth in gross domestic product -- a measure of all goods and services produced within U.S. borders - rose at a 1.3 percent annual rate, the Commerce Department said. First-quarter output was sharply revised down to a 0.4 percent pace from 1.9 percent. Economists had expected the economy to expand at a 1.8 percent rate in the second quarter. In addition, fourth-quarter growth was revised down to a 2.3 percent pace from 3.1 percent, indicating that the economy had already started slowing before the high gasoline prices and supply chain disruptions from Japan hit. Economists had expected the economy would show signs of perking up by now with Japan supply constraints easing and gasoline prices off their high, but data has disappointed. This and the sharp downward revisions to the prior quarters suggest a more troubling and fundamental slowdown might be underway.

(Reuters) - U.S. civilian employment costs surged a steeper-than-expected 0.7 percent in the second quarter, the biggest gain since September 2008, on a jump in benefits costs, Labor Department data showed on Friday. Analysts polled by Reuters had expected the Employment Cost Index to increase 0.5 percent in the three months ending in June, after a 0.6 percent rise in the prior quarter. Benefits costs, which make up about 30 percent of compensation, grew 1.3 percent in the quarter, the biggest gain since June 2007. Wages and salaries expanded by 0.4 percent in the second quarter after increasing by the same amount in the first quarter. Over 12 months, compensation costs rose 2.2 percent, the sharpest annual increase since December 2008. (Reporting by Mark Felsenthal, Editing by Chizu Nomiyama)

(Reuters) - The U.S. Treasury Department said it will meet with primary-market dealers in New York on Friday as part of regularly scheduled meetings ahead of next week's quarterly refunding announcement. "These meetings typically give us an opportunity to hear the latest from those who buy U.S. Treasuries, and we expect them to be particularly useful as we enter a period where Congress has not yet acted to raise the debt ceiling," a Treasury official said. (Reporting by Glenn Somerville)

As we discussed yesterday, Treasuries continue to rally more and sell-off more than MBS depending on the flavor of the day. Today is a rally day, both due to overnight trading (Spain downgraded by Moody's, Boehner cancelled vote for his debt plan), as well as the morning's economic data. The data showed a much weaker than expected Advance GDP and employment costs rising at their fastest pace since 2008. While MBS (Fannie 4.0's) are up 7 ticks on the day at 101-00, 10yr notes are up 18 ticks in price, dropping yields to 2.89. Yields have been flagging sideways in a narrow range around 2.885 since falling from 2.91+ before the release of the data.