Memorandum of Understanding (MoU) for the country’s bank bailout program, rumors are swirling about the EFSF’s role and subordination of bondholders. A weak Spanish bond auction sent 10-year bond yields dangerously close to the 7% mark. While Spanish yields exceeded 7% in the past, it does not diminish the fact that this level makes servicing debt prohibitively expensive. When yields broke above this critical mark in June, it pulled back quickly but if 10 year Spanish bond yields rise above 7% again and stay there for an extended period of time, the risk of a sovereign bailout increases significantly. Meanwhile the Spanish-German bund 10-year bond spread hit a record high, which tells us that investors require increasingly greater return for lending money to Spain versus Germany.

As for the U.S., this morning’s economic reports were ugly. Jobless claims increased by 386k, up from 352k for the week of July 14th. While claims were distorted by the annual auto plant retooling period, nothing distorted the Philly Fed survey, existing home sales and leading indicator reports, all of which surprised to the downside. The Philly Fed Survey rose to -12.9 from -16.6 but the improvement was significantly smaller than the market’s -9.0 forecast. Existing home sales also fell 5.4 percent last month against expectations for a 1.5% rise. The absolute level of existing home sales reached its lowest level since October but there was one element of good news – the average price of a home sold increased for the fifth consecutive month. Leading indicators on the other hand dropped 0.3 percent, which was the steepest decline since September 2011. For the Federal Reserve, the latest economic reports harden the case for QE3 but once again, the data is still not weak enough to force the Fed’s hand.