Our benchmark FNMA 6.0% mortgage bond continued its recent 'sideways' move along the 200-day MA with a 6bp loss to close at $101.25. The bond wasn't able to take much advantage of the day's bond-friendly news that showed lower inflation and a worsening economy. Inflation as measured by the Consumer Price Index (CPI) fell a record 1% during October due to a record 8.6% drop in energy prices. The surprisingly large price drop was the greatest in 61 years. After stripping out volatile food and energy prices, the Core CPI fell for the first time since 1982 with a decline of -0.1%. Economists had forecast a -0.8% drop in the CPI and a 0.1% gain in the Core CPI. The lower inflation numbers will pave the way for the Fed to continue to cut short-term interest rates, perhaps down to zero before they are done. The Housing Sector continued to weaken with Housing Starts falling to an annual rate of 791,000 in October. Starts have dropped 38% over the past year and have fallen 70% from their peak in 2006. Building Permits didn't fare much better with a 12% decline to 708,000, 40% lower over the past year. Economists were looking for 780,000 Starts and 772,000 Permits. The Starts number was a little better than expected but the Permits number was worse. Both numbers were revised higher for September. Starts were raised to 828,000 from 817,000 while Permits were raised to 805,000 from 786,000. Executives from the 'Big 3' auto makers continued their plea for government assistance, this time before the House Financial Services Committee. With the Congress in 'Lame Duck' mode, the timing for an auto bailout is less than ideal and it looks like no aid package for the 'Big 3' will be voted on any time soon. The uncertainty over the fate of the big automakers creates more worries for investors who fear a crippled auto industry will have a severe, negative impact on U.S. manufacturing. In the credit markets, the three-month dollar LIBOR rate edged lower from 2.22% yesterday to 2.17% today but other areas of the credit market showed signs of freezing up once more and this had a negative impact on financial sector stocks. The Fed's FOMC Minutes from their Oct. 29 meeting projected a larger than previously forecast drop in GDP for 2009 with Fed policy members expecting the economic decline to continue for at least a year, if not longer. The stock market accelerated its losses following the downbeat economic forecast outlined in the Minutes, particularly during the last 30 minutes of trading. The Dow shed 5% and 427 points to close at 7,997 while the broader S&P 500 Index broke below a key support level, losing 6% or 52 points, to end at 806. The NASDAQ Composite Index also lost 6%, or 96 points, to finish at 1,386.