The May employment data has been a huge shock to the markets and the outlook for the economy. The unemployment rates increased to 8.2% frm 8.1% the past two months. Non-farm jobs were expected to be up about 150K, jobs increased just 69K and private jobs were thought to be up 168K, as reported up 82K. April non-farm jobs were revised down 38K frm the original report and Mach jobs revised lower by 11K frm originally reported. April non-farm private jobs originally reported +130K were also revised lower, to +87K -43K. Factory employment increased by 12,000, less than the survey forecast of a 15,000 increase. Employment at service-providers increased 84,000 in May. Construction companies cut 28,000 jobs, the most in two years, and retailers boosted payrolls by 2,300. Government payrolls declined by 13,000. Average hourly earnings increased 0.1%. Compared with May of last year, earnings climbed 1.7%, the smallest increase since December 2010. The average work week for all workers fell to 34.4 hours from 34.5 hours. The so-called underemployment rate -- which includes part-time workers who'd prefer a full-time position and people who want work but have given up looking -- increased to 14.8% from 14.5%. The report also showed an increase in long-term unemployed Americans. The number of people unemployed for 27 weeks or more rose as a percentage of all jobless, to 42.8% from 41.3%. No matter how one looks at it, the employment data clearly shows the US is being dragged down by Europe and its complete inability to deal with its debt problems. The initial reaction to the report this morning sent the 10 yr note yield down to 1.44% -13 bp frm yesterday's close and down 31 basis points since last Friday's close. Mortgage prices on the reaction increased 11/32 but by 9:00 MBS prices had fallen back to +6/32 (.16 bp). The DJIA futures on the reaction fell 200 points, by 9:00 though -166. Also at 8:30, April personal income expected up 0.3% was reported up 0.2% while spending increased 0.3% as expected. Wanting lower interest rates is what most want to see, but as with eating candy, too much makes us sick. The rapid drop in rates this week is setting off a run to renege and recast those locks of a week ago. Those that are re-financing are likely to increase their demand for lower rates and walk away. Lenders are facing the problem of what will actually close and at what rate. How low can rates go? We don't know for sure, but technically the bond market is very overbought for the moment, panic is increasing with investors and Europe continues to move closer to the preverbal cliff. The best scenario now would be for interest rates to stabilize and move up a little; not cheering for higher rates, but markets are unstable here and in need of consolidation. We expect there will be some retracement soon as the bond market is currently stretched to its limit; not saying in any way that rates have bottomed, but expect an increase in price volatility next week. Longer term, the present bullish trend could withstand a backup to 1.60% on the 10 and not change the bullish outlook. That said, at this point it is unlikely that will occur, but there will be some rebound coming very soon. The DJIA opened -116, NASDAQ -51; the 10 yr note yield climbed back to 1.50% frm 1.46% on the employment report, MBS prices +5/32 (.15 bp) and down from +11/32 (.34 bp) on the reaction to the employment report. As noted in the above paragraph we don't look for more declines in rates over the next few days; mainly a technical observation but we have confidence in it and will stand by our short term forecast that rate markets will consolidate here for a while. Continuing today's data; at 10:00 the May ISM index expected at 54.0 fell to 53.5 and down from 54.8 in April. New orders component increased to 60.1 frm 58.2, employment at 56.9 frm 57.3 and prices pd at 47.5 frm 61.0. Another weak report but no immediate reaction with rates already rallying. April construction spending at +0.3%. After the very weak data today the idea of another Fed QE has increased. I still cannot square why the Fed would need more QE with rates at these lows. What is the advantage of more Fed involvement? Will it force more employment, NO, will it force investors to invest in equities looking for profits, NO. Will it force investors to move money out of the US to sovereigns return higher rates, POSSIBLY.