Rather than discreet, explosive tape-bombs, the two day EU summit that began yesterday offered up a steady stream of fairly generic encouragements for the Euro zone crisis.  We're not sure anyone believes what they're saying or the percentage of traders that believe what they're hearing, but the customary response seems to be a muted, but noticeable default weakness for the risk-free safe havens such as Treasuries. 

The day could have easily gotten far more out of hand had it not been for a few foils to the Euro zone love-fest, including the early release of Google earnings that helped tank the "risk-on" trade to some extent.  Then again, there's one more day left this week for things to get out of hand, though the first round of information out of the EU Summit suggests that headline surprises are less likely.  Euro-phoria may continue to provide that same, steady, grinding pressure on Treasuries and MBS, but the other major theme is that of Fed Frontrunning.

There's not a perfect way to describe Fed Frontrunning, but the concept is simple enough.  It begins with QE3--the policy decision that resulted from the Fed's hand finally being forced by a seemingly endless supply of lackluster economic data.  QE3 is open-ended, meaning as the situation improves, markets may begin pricing in some chance of decremented injections.  To be clear, we don't think anyone believes that we're close to such a thing, but at whatever time it clearly enters the horizon--just as QE3 itself clearly entered the horizon months ahead of its announcement--markets will begin to adjust for it, just as they adjusted (constantly!) for the ever-changing prospects of QE3.  Fed-Frontrunning...

This time around, the Fed frontrunning is brought to us by a string of economic data that has been less than utterly nauseating.  Meh... These things happen.  MBS devotees aren't necessarily doom and gloomers hoping for a world in chaos in order to keep rates low, but for our part, we're not quite there yet in allowing such things onto the horizon.  That said, we still have to account for the fact that other markets participants could be just fine with it.  We're pretty sure they'll wait to hear what the Fed has to say next week before doing anything stupid, but there's a bit more room for weakness if that's the way the front-running starts leaning. 

Considering that today's only economic data offering is Existing Home Sales, there will also be plenty of room for technical trading levels and "follow the leader" tradeflows to guide the pace.  That said, the relatively larger-than-expected reaction to Housing Starts this week remains fresh in our minds, and it might give a deviant result in today's home sales report more teeth.