For the shortened week, the Dow gained 1.3% (down 4.7% y-t-d), and the S&P500 rose 1.7% (down 4.6%). The Transports jumped 5.4%, increasing 2008 gains to 19.0%. The Morgan Stanley Cyclicals increased 1.8% (down 2.0%), and the Morgan Stanley Consumer index gained 1.3% (down 4.5%). The broader market was quite strong. The small cap Russell 2000 jumped 3.2% (down 2.3%). The S&P400 Mid-Caps gained 2.7%, increasing y-t-d gains to 2.8%. The technology rally resumed. The NASDAQ100 jumped 3.6% (down 2.5%), the Morgan Stanley High Tech index 4.0% (down 0.8%), and the Semiconductors 3.6% (up 1.8%). The Street.com Internet Index rose 3.2% (down 0.4%), and the NASDAQ Telecommunications index surged 4.3% (up 3.5%). The Biotechs gained 2.9% (down 3.5%). The Broker/Dealers gained 3.8% (down 19%), while the Banks dipped 0.4% (down 14.4%). With Bullion sinking $38.50, the HUI gold index fell 4.6% (up 3.0%).

One-month Treasury bill rates jumped 10 bps this week to 3-month high 1.985%, and 3-month yields added 2.5 bps to 1.90%. Two-year government yields surged 21.5 bps to 2.65%, the high since early January. Five-year T-note yields jumped 28 bps to 3.43%, and 10-year yields rose 21 bps to 4.06%. Long-bond yields gained 15 bps to 4.72% (high since the end of October). The 2yr/10yr spread was little changed at 141 bps. The implied yield on 3-month December '08 Eurodollars jumped 16 bps to 3.11%. Benchmark Fannie MBS yields surged 29 bps to 5.71% (high since March 11). The spread between benchmark MBS and 10-year Treasuries increased 7 to a one-month high 165 bps. The spread on Fannie's 5% 2017 note was little changed at 58 bps, and the spread on Freddie's 5% 2017 note was one wider to 58 bps. The 10-year dollar swap spread increased 3.25 to 64.75. Corporate bond spreads were stable to narrower. An index of investment grade bond spreads narrowed 8 to 100 bps, and an index of junk bond spreads narrowed one to a 3-month low 593 bps.

Investment grade issuance included Cleco Power $250 million.

Junk issuers included Pemex $3.0bn, International Paper $3.0bn, American Express $1.75bn, IBM International $1.5bn, Cox Communication $1.0bn, National Development $1.0bn, Nucor $650 million, CSC Holdings $500 million, Rexam $550 million, BMC Software $300 million, Cardinal Health $300 million, Kansas City Southern $275 million, Georgia Power $250 million, and Moog $200 million.

Convert issuance this week included Hercules Offshore $250 million, Symbion $180 million, and Jet Blue $175 million.

International dollar bond issuance included Telecom Italia $2.0bn and Braskem $500 million.

German 10-year bund yields jumped 14 bps to a 7-month high 4.40%, with yields up 23 bps in two weeks. The German DAX equities index rallied 2.2% (down 12% y-t-d). Japanese 10-year "JGB" yields added 1.5 bps to a 9-month high 1.75%. The Nikkei 225 rose 2.3% (down 6.3% y-t-d and 18.5% y-o-y). Emerging debt and equities markets were mixed. Brazil's benchmark dollar bond yields declined 4 bps to 6.01%. Brazil's Bovespa equities index gained 1.6% (up 13.6% y-t-d and 38.2% y-o-y). The Mexican Bolsa jumped 2.9% (up 8.3% y-t-d). Mexico's 10-year $ yields surged 26 bps to 5.19%. Russia's RTS equities index gained 1.0% (up 7.4% y-t-d). India's Sensex equities index declined 1.4%, boosting y-t-d losses to 19.1%. China's Shanghai Exchange lost 1.1%, with 2008 losses at 34.7%.

Freddie Mac 30-year fixed mortgage rates jumped 10 bps to an 11-week high of 6.08% (down 34 bps y-o-y). Fifteen-year fixed rates rose 11 bps to 5.66% (down 46 bps y-o-y). One-year adjustable rates slipped 2 bps to 5.22% (down 35 bps y-o-y).

Bank Credit expanded $8.6bn to $9.401 TN (week of 5/21). Bank Credit has expanded $188bn y-t-d, or 5.1% annualized. Bank Credit posted a 44-week surge of $758bn (10.4% annualized) and a 52-week rise of $861bn, or 10.1%. For the week, Securities Credit slipped $2.7bn. Loans & Leases gained $11.3bn to $6.908 TN (44-wk gain of $583bn, or 10.9% annualized). C&I loans added $1.9bn, with one-year growth of 21%. Real Estate loans gained $6.6bn (up 4.0% y-t-d). Consumer loans declined $3.3bn, while Securities loans gained $3.4bn. Other loans added $2.7bn. Examining the liability side, Deposits jumped $27.4bn.

M2 (narrow) "money" supply rose $12.7bn to $7.690 TN (week of 5/19). Narrow "money" has expanded $227bn y-t-d, or 7.9% annualized, with a y-o-y rise of $458bn, or 6.3%. For the week, Currency increased $2.1bn, while Demand & Checkable Deposits fell $7.4bn. Savings Deposits jumped $25.4bn, while Small Denominated Deposits dipped $0.9bn. Retail Money Funds declined $6.5bn.

Total Money Market Fund assets (from Invest Co Inst) declined $4.3bn last week to $3.505 TN, while posting a y-t-d gain of $392bn, or 31.1% annualized. Money Fund assets have posted a one-year increase of $1.016 TN (40.8%).

There was no Asset-Backed Securities (ABS) issuance this week. Year-to-date total US ABS issuance of $88.5bn (tallied by JPMorgan's Christopher Flanagan) is running 26% of the comparable level from 2007. Home Equity ABS issuance of $303 million compares with 2007's $172bn. Year-to-date CDO issuance of $13.4bn compares to the year ago $178bn.

Total Commercial Paper dipped $1.1bn to $1.754 TN. CP has declined $470bn over the past 42 weeks. Asset-backed CP increased $9.6bn (42-wk drop of $442bn) to $754bn. Over the past year, total CP has contracted $359bn, or 17%, with ABCP down $383bn, or 34%.

Fed Foreign Holdings of Treasury, Agency Debt last week (ended 5/28) jumped $16.1bn to a record $2.293 TN. "Custody holdings" were up $236bn y-t-d, or 27.2% annualized, and $334bn year-over-year (17.0%). Federal Reserve Credit expanded $6.8bn to $878bn. Fed Credit has expanded $4.5bn y-t-d, while having increased $24.2bn y-o-y (2.8%).

International reserve assets (excluding gold) - as accumulated by Bloomberg's Alex Tanzi - were up $1.433 TN y-o-y, or 27%, to a record $6.809 TN.

Global Credit Market Dislocation Watch:

May 24 - Financial Times (Gillian Tett): "Is something nasty lurking in the leveraged loan woodshed? That is a question a lot of investors are asking these days. As summer approaches, there are mounting signs that banks are slowly working through the subprime horrors. For example, last week Fitch, the rating agency, suggested that banks could have written off about 80% of their likely subprime hits. But now some investors are starting to wonder if the banks could soon be hit by a new wave of problems, this time from the leveraged loan world. This sector has also seen a dramatic surge of lending in recent years, with a commensurate fall in lending standards. Thus, as the economy slows, the risk is that private equity players could soon start defaulting, creating more bad debt. Is this a real risk in the second half of this year?"

May 28 - Financial Times (Ben White and Francesco Guerrera): "A rift is developing among large US investment banks over whether continued access to a special Federal Reserve borrowing facility is worth the expected trade-off in further regulation by the central bank. Investment banks such as Goldman Sachs that have been less affected by the credit crisis are said to be leaning against accepting any significant new limits by the Fed, while those that have been somewhat more affected, such as Lehman Brothers, are seen as more eager to maintain access to the Fed facility even if it means new limits on risk-taking... The issue is about to hit a critical stage because the Fed has said it will curtail the ability of investment banks to borrow from the primary dealer credit facility, which is similar to the so-called discount window available to commercial banks, in mid-September."

May 29 - Bloomberg (Gavin Finch): "The cost of borrowing in euros for one month rose to the highest level since Dec. 21, according to the European Banking Federation. The euro interbank offered rate, or Euribor, rose 10 basis points to 4.47%..."

May 27 - Bloomberg (Gavin Finch and Ben Livesey): "Few companies have suffered from the subprime mortgage collapse more than UBS AG, which has taken $38 billion of writedowns and losses, replaced its chief executive officer and chairman and saw its stock tumble 60%. Yet on 85% of the days between July and mid-April, the ...bank told the British Bankers' Association that it could borrow in the money markets at lower interest rates than its rivals... Such discrepancies are creating a crisis of confidence in the London interbank offered rate published daily..."

May 29 - Bloomberg (Liz Capo McCormick): "Traders are starting to use alternative measures for borrowing costs as the British Bankers' Association struggles to keep the London interbank offered rate as the global standard. Libor, the benchmark for 6 million U.S. mortgages and more than $350 trillion of derivatives and corporate bonds, has been called into question since the Bank for International Settlements said in March some lenders may have understated borrowing costs to keep from appearing like they are in financial straits."

May 30 - Bloomberg (Shelley Smith): "Telefonica SA, Europe's second-largest phone company, and luxury carmaker Bayerische Motoren Werke AG led 86 billion euros ($133bn) of corporate bond sales in May, the second-busiest month for issuance in a year. Sales soared 53% above the monthly average of 56 billion euros for the 12 months..."

Global Inflation Turmoil Watch:

May 28 - Bloomberg (Mark Gilbert): "Higher oil prices will stoke inflation in the U.S. and may add as much as a full percentage point to consumer prices this year, according to David Rosenberg, chief North America economist at Merrill Lynch... 'It seems obvious that there is little chance of any relief over the short and intermediate term, barring a collapse in demand, particularly in the emerging-market world... If the oil price fails to recede from the current record level, the implications for our calls on inflation and real GDP growth would be significant.'"

May 28 - Wall Street Journal Asia (James Hookway): "Vietnam's worsening inflation is threatening to morph into a full-blown crisis and provides a warning to other Asian countries trying to tamp soaring prices... Vietnam presents a worst case scenario of what could happen if the region's central banks don't act swiftly to curb rising prices at a time when their economies - unlike those of the U.S. and western Europe - are still showing robust growth."

May 28 - Bloomberg (Cherian Thomas): "Indian Prime Minister Manmohan Singh came to power pledging to improve the lives of common people. Soaring fuel and food prices are jeopardizing that goal, and his political future, as his term enters its final year. Singh's Indian National Congress party lost elections this week in the southern state of Karnataka, its ninth failure to take or hold power in the 11 provincial polls held since January 2007. A third of India's 691 million voters live in the nine provinces where the party was defeated."

May 28 - Bloomberg (Nasreen Seria): "South African central bank Governor Tito Mboweni said the bank will need to take 'drastic measures' to bring inflation back within the 3% to 6% target range. 'You don't have to be a genius to know that interest rates have be tightened,' Mboweni said... 'Drastic measures are required.'"

Currency Watch:

May 28 - Bloomberg (Haris Anwar): "Trading volume in the global currency market surged 36% to $100 trillion in 2007, a report by Greenwich Associates said. Hedge fund investors were the biggest drivers of growth among the 1,780 accounts surveyed by Greenwich in North America, Europe and Asia... 'For global foreign exchange users, we've entered into an era of something close to free liquidity,' said Robert Statius- Muller, a London-based associate consultant of the firm... 'Cheap access to liquidity from a broad and growing list of sources is drawing in new participants.' Hedge funds' foreign exchange transactions rose 180%, accounting for close to 20% of 2007 volume compared with 11% in 2006. Volume driven by investment managers increased 31%. Corporate client volume rose 12%."

May 28 - Bloomberg (Emma O'Brien): "Russia's central bank bought less than $10 billion to suppress the ruble in May as the amount of foreign funds coming into the country declined... The bank purchased $30 billion in April..."

The dollar index rallied 1.4% to 72.88. For the week on the upside, the South Korean won increased 2.0%, the Brazilian real 1.9% (9-year high), the South African rand 1.2%, and the Mexican peso 0.7%. On the downside, the Japanese yen declined 2.0%, the Swiss franc 1.7%, the Norwegian krone 1.7%, the Swedish krona 1.5%, the Euro 1.4%, and the Danish krone 1.3%.

Commodities Watch:

May 30 - Bloomberg (Dale Crofts): "U.S. steel-sheet prices rose 20% in May, surpassing April's record, after steelmakers took advantage of declining imports to pass on rising costs for raw materials, Purchasing magazine said... Hot-rolled steel sheet, the benchmark product used in cars and appliances, climbed to an average $1,020 a ton in May from $850 in April, the magazine said. Prices have gained 76% since January."

May 28 - Wall Street Journal (Ana Campoy and Leslie Eaton): "In a move that may fuel inflation in consumer goods ranging from plastic wrap to diapers to food, Dow Chemical Co. said it will boost prices of its products by as much as 20% because of soaring energy prices. Dow Chemical, one of the largest chemical manufacturers in the world, uses oil-based products and natural gas as raw materials and is also a heavy user of energy to power its manufacturing plants. The... company said its oil- and gas-related costs in the first quarter were up 42% from a year earlier..."

May 29 - Bloomberg (Chris Burritt): "Dow Chemical Co., the largest U.S. chemical maker, may not be the last to raise prices this year because of soaring raw materials costs. Monsanto Co., Hershey Co., General Mills Inc. and Avery Dennison Corp. may follow suit... 'We are going to see a cascading of higher prices through the system,' said Steve Hoedt, who helps manage $34 billion... at National City... 'Companies that are able to push prices through to their customers are the ones that are going to be successful.'"

May 28 - Financial Times: "When the lawnmower man joins airlines in adding a fuel surcharge to his bill, it is clear high energy costs are feeding through the system. Dow Chemical... added weight to the fear that soaring prices will add to core inflation by announcing plans to raise its prices by up to 20%."

May 29 - Financial Times (Carola Hoyos and John Aglionby): "Opec's only Asia Pacific member - Indonesia - yesterday quit the oil cartel, finally accepting its dramatic shift from an oil exporter to a consumer crippled by high prices. The decision is one of the strongest signals yet of the economic and social impact on Asia - the world's engine of economic growth and oil demand - of $130-a-barrel oil. ...as a net importer of oil, the country wanted world prices to fall while Opec's 12 other members wanted them to remain high."

May 28 - Bloomberg (Yuriy Humber): "Russian steelmakers including Roman Abramovich's Evraz Group SA plan to spend at least $24 billion through 2011 boosting capacity to meet surging domestic demand for building materials and railroad track."

May 28 - Economic Times: "Balloon, the cheapest toy, has fallen prey to spiralling inflation. The high price of natural rubber latex has pushed up production costs by 15-20%... Prices of other raw materials like pigments, sulphur and titanium dioxide have also risen, along with the crude oil price."

Gold dropped 4.2% to $886.58, and Silver sank 7.8% to $16.87. July Crude fell $4.57 to $127.62. July Gasoline dipped 0.3% (up 36% y-t-d), and July Natural Gas declined 1.4% (up 58% y-t-d). July Copper dropped 3.5%. July Wheat added 1.2%. The CRB index fell 2.1% (up 17.7% y-t-d). The Goldman Sachs Commodities Index (GSCI) dropped 3.2% (up 29% y-t-d and 65% y-o-y).

China Watch:

May 26 - Bloomberg (Zhang Dingmin): "China's foreign-exchange reserves rose to $1.76 trillion at the end of April, Reuters reported... The reserves jumped by a record $74.46 billion last month, surpassing the previous monthly record of $61.6 billion in January..."

May 30 - Bloomberg (Li Yanping): "China's economic growth may slow 'moderately' in 2008 due to weakening global demand and disruptions from disasters, the People's Bank of China said. Inflation control must remain the top priority of central and local governments this year, the bank said..."

May 28 - Bloomberg (Ron Day): "China, the world's biggest cotton grower, will import 37% more of the fiber in the year starting Aug. 1 as demand rises and production slips, the U.S. Department of Agriculture said... Production will decline 1.1% to 7.7 million tons as farmers plant more profitable grains...the USDA's [said]..."

May 30 - Bloomberg (Chia-Peck Wong): "Hong Kong lending rose 25% in April as the city's economic growth and low interest rates drove demand for credit."

May 26 - Bloomberg (Chia-Peck Wong): "Hong Kong's new mortgages rose 67% in April as lower interest rates fueled demand for loans. Banks in Hong Kong approved HK$24.2 billion ($3.1 billion) of new mortgage loans in April, the Hong Kong Monetary Authority said...up from HK$14.5 billion a year ago."

Japan Watch:

May 30 - Bloomberg (Toru Fujioka and Jason Clenfield): "Japan's household spending fell the most in 19 months, factory production dropped and unemployment climbed, stoking concern the longest postwar expansion is coming to an end. Spending decreased 2.7% in April from a year earlier... The jobless rate rose to a seven-month high of 4% and industrial output fell for a second month."

India Watch:

May 30 - Times of India: "The government's administrative and fiscal measures failed to have the desired effect on soaring prices as inflation... moved up sharply to 8.1%. Announcing the figure... Finance Minister P Chidambaram expressed confidence that the government would be able to soon rein the inflation in. 'It is worrisome, but we are confident of gaining mastery over inflation,' he said."

May 30 - Bloomberg (Cherian Thomas): "India's economic growth held at the weakest pace since 2005 as the highest interest rates in six years discouraged consumer spending and investment. Asia's third-largest economy expanded 8.8% in the three months to March 31 from a year earlier..."

May 30 - Bloomberg (Anil Varma): "India's foreign-exchange reserves increased $2.09 billion to a record $316.2 billion in the week ended May 23..."

May 26 - Economic Times: "India's fiscal deficit continues to be among the highest in the world and underlying pressures are not entirely showing up in headline fiscal numbers... India aims to bring down its fiscal deficit to 2.5% of GDP for the 2008/09 year compared to 3.1% in 2007/08."

Asia Watch:

May 29 - Bloomberg (Chinmei Sung and James Peng): "Taiwan's economy expanded faster than economists estimated in the first quarter, stoked by overseas shipments and a pickup in consumer spending. Gross domestic product rose 6.06% from a year earlier..."

May 27 - Financial Times (Amy Kazmin): "Vietnam's annual inflation rate accelerated to 25.2% cent in May, the fastest since 1992... The surge in prices... was driven by a 67.8% year-on-year increase in the price of grain... Construction and housing costs were also 22.9% higher than last year."

May 29 - Financial Times: "Vietnam, one of last year's most fashionable investment spots, is losing its lustre. Inflation is running at 25% year-on-year and the official economic growth forecast for 2008 has been cut from 9 to 7%. The current account deficit is glaring and the forward market suggests a devaluation of up to a third in the semi-pegged currency is possible. Meanwhile, the stock market, shut yesterday due to technical issues, is down 55% so far this year."

May 30 - Bloomberg (Anusha Ondaatjie): "Sri Lanka's inflation accelerated for a fifth month in May... Consumer prices in the capital Colombo rose 26.2% from a year earlier..."

May 30 - Bloomberg (Cesilia Han): "Thailand's foreign-exchange reserves rose 1.7% to $110.1 billion last week... the central bank said..."

Latin America Watch:

May 26 - Bloomberg (Joshua Goodman): "Brazilian President Luiz Inacio Lula da Silva said farm subsidies in the richest nations are to blame for the global surge in food prices. 'It's up to the governments in rich countries to allow for the free flow of grains, beef and biofuels,' Lula said in speech... 'The protectionism barriers in favor of products from rich nations are unacceptable.'"

Unbalanced Global Economy Watch:

May 29 - Bloomberg (Brian Swint and Jennifer Ryan): "U.K. house prices fell in May by the most since at least 1991 as the shortage of credit starved the property market of buyers, Nationwide Building Society said. The price of an average home dropped 2.5% from April to 173,583 pounds ($344,000)..."

May 30 - Bloomberg (Fergal O'Brien): "Irish mortgage lending grew at the slowest annual pace in almost 16 years in April as rising borrowing costs and sliding property prices deterred prospective homebuyers. Home loans increased 11.4% from a year earlier..."

May 29 - Financial Times (Ralph Atkins): "Eurozone inflation has surged back to the record levels seen earlier this year, German data suggested yesterday, as soaring oil prices all but ruled out an early cut in European Central Bank interest rates. Germany's annual inflation rate leapt from 2.6% in April to 3% this month... Heating oil prices had risen by up to 13% compared with April, and diesel by 9%. As a result, eurozone inflation has probably risen from 3.3% to about 3.6% this month..."

May 29 - Bloomberg (Jurjen van de Pol): "Inflation in Belgium accelerated to the fastest in 23 years in May as record oil prices pushed up energy costs. Consumer prices increased 5.2% from a year earlier..."

May 29 - Bloomberg (Ben Sills): "Inflation in Spain accelerated in May to the fastest pace in at least 11 years as oil prices rose to a record, boosting energy costs. Consumer prices gained 4.7% from a year ago using the European Union's calculation method, after a 4.2% increase in April..."

May 30 - Bloomberg (Flavia Krause-Jackson): "Italy's inflation rate in May unexpectedly rose to the highest in more than 11 years last month... Consumer prices... rose 3.7% from a year earlier..."

May 29 - Bloomberg (Tasneem Brogger): "Denmark's unemployment rate unexpectedly dropped to 1.8% in April, the lowest since 1973, fueling demands for higher pay and threatening to hurt the competitiveness of local industry."

May 29 - Bloomberg (Robin Wigglesworth): "Norway's jobless rate unexpectedly fell to a 21-year low this month, exacerbating a labor shortage that may damp economic growth and drive wages and inflation higher. The rate fell to 1.5%..."

May 29 - Bloomberg (Laura Cochrane): "Australian homeowners are falling behind on their mortgages at a quickening rate as higher interest charges drive up repayments, with arrears in mining boom state Western Australia gaining at the faster pace in the nation. Mortgage holders more than 30 days late on payments increased to 1.88%... from 1.56 percent in the previous six months... Resource-rich Western Australia state, where demand for iron ore from China and India has contributed to a 74% increase in house prices in the past three years, recorded the largest jump in mortgage arrears, to 1.42% from 0.97%."

May 30 - Bloomberg (Mike Cohen and Nasreen Seria): "South African credit growth slowed last month to below 20% for the first time since December 2005, after the central bank raised its benchmark interest rate for a fifth time in less than a year. Growth in borrowing by households and companies eased to an annual 19.6% from 22.6% in March..."

May 28 - Bloomberg (Nasreen Seria): "South Africa's inflation rate unexpectedly rose to 10.4% in April, the highest in more than five years, increasing chances the central bank will raise interest rates at least twice more this year."

May 29 - Bloomberg (Nasreen Seria): "The cost of goods leaving South African factories and mines rose at a faster pace in April than the previous month, adding to pressure on the central bank to continue raising interest rates. Producer-price inflation accelerated to 12.4% from a revised 11.9% in March..."

Bursting Bubble Economy Watch:

May 28 - Dow Jones (Michael R. Crittenden): "Banking industry earnings in the U.S. continued to be weak during the first quarter of 2008, as the number of 'problem' banks continued to grow and firms continued to set aside billions to cover delinquent loans that grew across most loan categories. The Federal Deposit Insurance Corporation said... banks reported net income of $19.3 billion for the first three months of 2008, a 45.7% decline from the $35.6 billion earned in the first quarter of 2007. More than half of all FDIC-insured firms reported lower net income in the first quarter."

May 27 - Wall Street Journal (Michael R. Crittenden): "Turmoil in the housing market continued to hurt the U.S. thrift industry during the first quarter, as institutions set aside a record amount to cover expected loan losses. The Office of Thrift Supervision said thrifts lost $617 million during the first three months of 2008, down from net income of $3.61 billion in the first quarter of 2007 but better than the record loss of $8.75 billion in the final quarter of 2007. The agency said thrifts set aside an industry-record $7.6 billion in loan-loss provisions during the first quarter, up from $5.5 billion in the previous quarter and $3.5 billion in the third quarter of 2007."

May 27 - The Wall Street Journal (Rebecca Smith): "Construction costs for power plants have more than doubled since 2000, according to new index data..., and inflationary pressures will continue to put the squeeze on electricity prices. The findings are bad news for consumers and utilities alike, and help explain why power-plant development has become something of a quagmire in the U.S. -- with no type of plant emerging as a reasonably priced option that can meet rising demand for electricity... 'Costs for labor, materials, equipment and design and engineering -- all are up,' said Candida Scott, senior director of cost and technology for CERA. As a result, the cost of building new plants is up 19% from a year ago and up 69% from 2005... In all, CERA says, the construction of new generating capacity that would have cost $1 billion in 2000 would cost $2.31 billion if construction began today."

Central Banker Watch:

May 29 - Bloomberg (Vivien Lou Chen): "Federal Reserve Bank of Dallas President Richard Fisher said he expects the central bank would raise the benchmark U.S. interest rate should the public begin to expect greater gains in consumer prices. 'If inflationary developments and, more important, inflation expectations continue to worsen, I would expect a change of course in monetary policy to occur sooner rather than later, even in the face of an anemic' economy, Fisher said... 'I don't know a single person on the committee that isn't concerned about inflation... The question is, 'what is the right treatment?' That is subject to debate.'"

May 30 - MarketNews International: "Surging energy and food prices, which have boosted eurozone inflation to record highs, are 'arguably the most worrying disturbance' since the beginning of monetary union ten years ago, European Central Bank Governing Council member Axel Weber said... 'The present price hikes are a timely reminder that, when it comes to inflation, complacency is out of place... Over the past decade, the Eurosystem has shown that -- if necessary -- it is prepared to act in a firm and timely manner. We will continue to do so over the next decades in order to maintain price stability in the euro area over the medium term.'"

Mortgage Finance Bubble Watch:

May 30 - Bloomberg (Josh P. Hamilton and Bob Ivry): "Newly delinquent mortgage borrowers outnumbered people who caught up on their overdue payments by two to one last month... In April, 73,880 homeowners with privately insured mortgages fell more than 60 days late on payments, compared with 39,584 who got back on track, a report... from the... Mortgage Insurance Companies of America said... Foreclosure filings surged 65% and bank seizures more than doubled in April compared with a year earlier..."

May 27 - Bloomberg (Lindsey Arent): "In the midst of the worst surge in mortgage defaults in seven decades, foreclosures in U.S. towns where soldiers live are increasing at a pace almost four times the national average, according to data compiled by research firm RealtyTrac Inc...."

Real Estate Bubble Watch:

May 27 - Wall Street Journal (Sudeep Reddy): "Home prices are falling at an accelerating pace, new data show, while a separate report found a shrinking share of Americans plan to buy a home anytime soon, suggesting more price declines in the months to come. The S&P/Case-Shiller index for the first quarter showed prices for existing homes nationwide declined 14.1% from a year earlier, compared with a year-to-year drop of 8.9% in the fourth quarter. A separate S&P index that tracks 20 major metropolitan areas on a monthly basis showed home prices dropped 14.4% in March from a year earlier and 2.2% from February."

GSE Watch:

Fannie Mae expanded its Book of Business at a 6.5% annualized rate during April to $2.986 TN. Freddie's Book of Business grew at a 4.7% rate to $2.158 TN.

Muni Watch:

May 30 - Bloomberg (Jeremy R. Cooke): "U.S. municipal bonds outpaced Treasuries for a third month, as demand for tax-exempt income and the prospect of reinvestment buoyed May's returns even as traders bet on higher interest rates by year-end."

California Watch:

May 27 - Bloomberg (Kathleen M. Howley and Dan Levy): "Housing demand in California, where one out of every eight U.S. residents lives, is reviving as bargain hunters buy foreclosed properties... Sales in the state increased 2.5% in April, following 30 consecutive declines... The median home price tumbled 32% in April from a year earlier to $403,870, the biggest drop in at least three decades... About 30,000 foreclosed homes have been auctioned in California so far this year... Banks holding repossessed properties are so eager to unload them they'll give buyers discounts of as much as 40%, said Celia Chen, an economist at Moody's..."

May 27 - Bloomberg (Robert Tuttle): "The average pump price of diesel in California rose above $5 a gallon for the first time... The price rose 29 cents to $5.027 a gallon..."

Speculator Watch:

May 30 - Financial Times (Sharlene Goff): "Investing in funds of hedge funds should, in theory, smooth out the volatility of financial markets and generate a steady stream of returns. But, in reality, a rather different picture has emerged in recent months. Some hedge fund managers have classed the first quarter of this year the worst on record. Very few have met their performance targets and many have fallen into negative returns. Volatile markets have made it hard for fund managers to judge how assets will perform, while the drying up of credit has forced many to sell investments. 'Most funds of funds have done poorly in the past six months,' says Mick Gilligan, director of fund research at Killik & Co. "The first quarter of the year has been pretty extreme, with many managers describing it as the worst they have ever experienced." He says that only 40-50% of funds of hedge funds have generated a positive return in the past six months. The uncertainty in the market has created a difficult backdrop. 'It has been quite volatile in every sector,' says Martin Baxter, who manages a fund of hedge funds at Collins Stewart. 'A lot of people are making money one day and losing it the next.'"

May 27 - Wall Street Journal (Joanna Slater): "Hedge funds and other investors made bundles of money in the 1990s betting currency pegs around the world would break. They are at it again, only this time they are gambling currencies will soar, not plummet. Among the prime targets are Persian Gulf nations that link their currencies to the U.S. dollar. An economic boom has touched off rampant inflation in these countries. That is putting pressure on policy makers to allow their currencies to strengthen, something they have said they have no plans to do."

Crude Liquidity Watch:

May 25 - Reuters: "State oil giant Saudi Aramco plans to invest $129 billion on new energy projects in the next five years, the company's executive vice president of operations said... Saudi Arabia is the world's largest oil exporter and Aramco is expanding to increase crude, gas, refining and petrochemical capacity. About $70 billion of the total would be spent by international and domestic joint ventures, and the remaining $59 billion on projects solely undertaken by Aramco... The $129 billion figure is nearly $40 billion higher that previous estimates given by Saudi official for expansion."

May 29 - Bloomberg (Glen Carey): "United Arab Emirates' inflation accelerated to 14% last year as fuel, housing and construction costs soared, Emirates Business 24/7 reported, citing a report from the state-controlled Abu Dhabi Chamber of Commerce."

May 30 - Bloomberg (Robin Wigglesworth): "Norway has oil and gas reserves worth about 7.5 million kroner ($1.5 million) for every man, woman and child, thanks to the soaring value of oil."

Our 7 lbs and 2 oz Dream Come True arrived this past week. I'll try to get back to my regular weekly posting soon.