Wednesday's session gave us real reason to hope that the scariest endgame scenarios of the recent sell-off were just the boogie men we hoped they would be.  One facemelting rally doesn't necessarily put an end to a sell-off, but after yesterday, we don't see the current sell-off continuing purely on the excuses of August "dog days," vacation time for market participants/EU leaders, fear of large-scale shift in EU policy/execution, technically driven rebounding, and lastly, decreased QE3 expectations.

It's this last point that seems most pertinent now, considering that's what Wednesday was all about.  Namely, the FOMC Minutes from the meeting ending August 1st were unexpectedly bullish on the topic of further easing.  The trademark passage from the minutes transcript seemed to jump off the page simultaneously to multiple news outlets.  All of them keyed in on the same thesis:

""Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery."

This is really a very big deal.  This is the reason that a majority of primary dealers have continued to view QE3 as a better than 50% likelihood.  Not to put too fine a point on it, the Fed just said the game is no longer about NOT GETTING WORSE...  That had been the consensus until these minutes came out.  In other words, QE3 seemed tied to a certain benchmark of negativity in domestic economic data and global economic risks.  If we managed not to cross the line, the Fed would stay their hand.

But now it's about the condition of SUBSTANTIAL and SUSTAINABLE STRENGTHENING in the pace of the recovery in order to NOT conduct QE3.  Simply put, whereas markets were "in the game" before, assumed to be performing adequately, but on notice to not make many more errors, now markets are "out of the game."  The burden of proof has shifted onto the pace of the economic recovery to speed right the heck up or QE's a comin'!

The positives and negatives of further easing could be argued indefinitely.  Really, a lot depends on what shape it takes.  For this and several other reasons, we're not interested in pontificating on the ifs/thens with respect to mortgage rates, but we do know that the "on again" wake up call of the minutes was certainly well-received in rates markets.  It takes some doing to earn this title any more, but it was an honest-to-goodness FACEMELTER.

Believe it or not, despite that melty goodness, we're still a bit defensive.  All we really got yesterday was confirmation that the majority opinion of primary dealers was accurate.  Yes Virginia, there is a higher than 50% likelihood of QE3.  We have to wonder if that news alone does all the heavy lifting in yesterday's rally or if it merely the turning point at which markets begin to circle the wagons for early September's tremendous line-up of potentially market moving events.  Probably a bit of both going on here, so it will be interesting to see how it unfolds in the coming days.  The nice thing is that we now have several convenient levels of overhead support in 10yr yields and underfoot prices in MBS to benchmark any potential slippage. 

Markets have chances to start showing that substantial and sustainable strengthening today with European and US manufacturing indexes overnight and into the morning hours (US version at 8:58).  Before that, it's weekly Jobless Claims at 8:30, with FHFA House Prices and New Home Sales later in the morning.  None of this excites us, and results would have to be extreme in order for markets to care much either.  To be sure, FHFA and Home Sales aren't going to cut it in terms of market-moving punch.  PMI has some potency if it beats or misses big, but especially if the beat/miss is in the same direction as similar beat/misses from the European PMI flashes overnight.  Jobless Claims are jobless claims.  Stuck in this range in the upper-middle 300's for so damn long, they're less glamorous than they used to be.  Perhaps if they do something other than stay stuck, we'll move them out of the bullpen.