Rarely do we hold a long position into an employment report. Dangerous with the volatility. Mortgages however are holding well; suggest floating a very small position overnight. Some gains in prices today frm morning price sets.

Treasuries and mortgages traded quietly through the day after the better than expected economic data this morning. Weekly jobless claims fell 20K, double what was expected and the lowest weekly filings (512K) since early January; continuing claims also declined 68K frm the previous week. Used to be focused on continuing claims but with many running out of entitlement we don't think about continuing claims in the same vain.

Congress passed the extension of the home buyers tax credit to the end of April, adding a tax credit for non-first time buyers as well ($6500). Look for a TV opportunity signing coming.

Employment and possible inflation fears that have been two of the centerpieces in the economic outlook also were shaken a little this morning and caused some head-scratching. Q3 worker productivity exploded to +9.5%, the highest productivity in six years. On the surface the conclusion may be that hiring will continue to drag as long as businesses can wrench that kind of productivity output from existing workers. But when Q3 unit labor costs are viewed (declined 5.2%) the conclusion might be that businesses can afford to hire more workers. Productivity at 9.5% is unlikely to be sustainable and may drive the move to increase hirings as corporate earnings improve. So far all we have in this economic rebound has been rapid and deep cost cutting, slashing inventories and dumping jobs; driving equity prices higher but still not helping consumer spending much. Consumers, unlike the government with its spending binge, are more prudent realizing that normal patterns of years of credit spending has been wrong for them and their families. If Wall Street had any real idea of how consumers are thinking, likely equity markets would not be so euphoric.

Inflation? The Fed says not to worry, we agree in the near term but unfortunately fixed income markets won't forget about it. Not a near term problem, likely not a problem for the next 12 months given the non-existent pricing power; it is the opposite, cost cutting, price reductions on Christmas shopping even before Halloween, unemployment staying high for at least the next year, the cost of credit going higher as banks gauge consumers with the blessings of the likes of Barney Frank and his fellow members of his fiefdom (House Financial Services Committee). Congress has little interest other than putting large banks back in business. The new credit card regs, supposedly meant to protect consumers has opened the door wide for banks to jump it and increase higher rates for all credit card users, regardless of credit quality. All before the consumer "protection" is to take place. Barney is silent, Congress is silent, Obama is silent. WTF, how would Barney react if mortgage brokers added some huge fees and charges to their originations? Obviously we know the answer.

Although the Fed supported markets yesterday by once again saying it will keep rates low for an extended period, still don't have a Fed definition of extended period (months, years, days?) Probably sooner rather than later based on what is occurring in the rest of the world; unless of course the Fed and the administration want the dollar to go banana(s) republic. European Central Bank President Trichet said today the ECB plans to phase out its unlimited liquidity operations next year, and Governor King’s Bank of England said U.K. officials will slow the pace of bond purchases. Similar to what the Fed is doing, but with more gusto. Australia and Norway have already increased rates and next year so too will the ECB, BofE and the Fed.

October employment at 8:30 tomorrow morning; last minute estimates, -175 non-farm jobs, the unemployment rate 9>9% from 9.8%. Non-farm job losses in Sept were 263K. Later in the day (3:00) Sept consumer credit, a very important series as far as we are concerned; consumers have been slashing credit use for months, banks are "helping" by not lending while profiting from the steepening yield curve. Consumer credit is expected to decline again by $10B, August -$12B, July -$21.6B.

PRICES @ 4:00 PM

10 yr note: 100.25 -1/32 3.53% unch

5 yr note: 100.05 +5/32 2.34% -3 BP

2 Yr note: 100.07 +1/32 0.88% -2 BP

30 yr bond: 101.19 +4/32 4.40% -1 BP

Libor Rates: 1 mo 0.241%; 3 mo 0.275%; 6 mo 0.554%; 1 yr 1.170%

30 yr FNMA 4.5 Nov: 101.01 +5/32 (.15 bp) (+5/32 (.15 bp) frm 9:30)

15 yr FNMA 4.0 Nov: 101.23 +5/32 (.15 bp) (+5/32 (.15 bp) frm 9:30)

30 yr GNMA 4.5 Nov: 101.07 +6/32 (.18 bp) (+6/32 (.18 bp) frm 9:30)

15 yr GNMA 4.0 Nov: 102.13 +4/32 (.12 bp) +4/32 (.12 bp) frm 9:30)

Dollar/Yen: 90.75 -0.02 yen

Dollar/Euro: $1.4874 +$0.0004

Gold Dec: $1091.10 +$3.80

Crude Oil Dec: $79.81 -$0.59

Goldman-Sachs

Commodity Index: 508.42 -4.94

DJIA: 10005.96 +203.82

NASDAQ: 2105.32 +49.80

S&P 500: 1066.63 +20.13