The Day Ahead: Moody's Questions U.S. Credit Rating. Bonds Shrug Off News

Equity futures are trading higher this morning despite word from Moody’s that it would have to question America’s triple-A credit rating unless it provides a credible plan to tackle its growing deficit. Steve Hess, a top sovereign debt analyst at Moody’s, said the U.S. appears to have “no plan” to reduce the deficit. “Can the United States do it is the big question right now and we are not sure either way,” he told Dow Jones Newswires. “We will wait and see what happens in the next couple of years on this front.”

Meanwhile, economic confidence in Europe rose for a second straight month to its highest level in more than two years. The July index rose 1.3 points to 101.3.  Economists at BMO said the populace may be “heartened by the view that there seems to be less uncertainty about the uncertain state of European debt.” European retail sales also expanded for a second month. The July Eurozone retail purchasing managers index rose 2 points to 52.4, with Germany leading the recovery.

Commentary from AQ....

Nintety minutes before the opening bell, Dow futures are trading 45 points higher at 10,493 and S&P 500 futures are up 6.25 points to 1,108.25. The S&P index is attempting to break resistance at the 200 day moving average/38% fibonacci retracement.

The bond market shrugged off the credit rating news and the flight to safety is still in tact, indicating the recent rise in bond yields have been a factor of debt supply auctions as opposed to demand for risk (stocks have benefitted from short covering). The 2-year note is UNCH at 100-01 yielding 0.609%. The benchmark 10-year note is +0-01 at 104-07 yielding 3.001%. Below is the long term chart we have been focusing on lately....inflection

Rate sheet influential MBS coupons traded well for most of the session yesterday. The front month Fannie Mae 4.5 coupon hit a new intraday record price  of 104-11+ before closing at 104-07, which is a new record high close. Yield spreads did widen into the afternoon session as benchmarks rallied and swap spreads came off their tights. Origination flows were seen mostly in 30yr 4.5s and 15 yr 4.0s, 3.50s got a bit more attention than usual, but nothing to get excited about...

The September delivery FNCL 4.0 is UNCH at 101-19. The FNCL 4.5 is UNCH at 103-27. The secondary market current coupon is 0.8bps lower at 3.723%. Yield spreads are already tighter vs. 5pm "going out" marks.

For the US, the day ahead is relatively light with one only important data release.

Key Events Today:

8:30 ― Investors will be looking for some clarity in this week’s Initial Jobless Claims index. The survey recorded just 427k claims in the week ending July 10 ― the lowest of the calendar year ― before jumping 37k to 464k in the period ending June 17. The weekly average in July so far is 450k, versus an average 467k in June, 458k in May, and 463k in April. The index remains stubbornly high, but things could be, and have been, worse: in July 2009 the weekly average was 563k.

“Recent jobless claims reports have been obscured by seasonal adjustment problems related to the annual retooling of auto manufacturing plants,” said economists at Nomura. “Looking through this noise, we believe the trend in jobless claims is around 450-460,000.”

2:00 ― The House Financial Services Committee holds a hearing on "The Future of Housing Finance: The Role of Private Mortgage Insurance".  Witnesses include  Mr. Patrick Sinks, President and Chief Operating Officer, Mortgage Guaranty Insurance Corporation, Ms. Marti Rodamaker, President, First Citizens National Bank of Iowa on behalf of the Independent Community Bankers Association, Ms. Janneke Ratcliffe, Associate Director, University of North Carolina Center for Community Capital and Senior Fellow, Center for American Progress, Mr. Anthony B. Sanders, Distinguished Professor of Finance, George Mason University, and Senior Scholar, The Mercatus Center at George Mason University, Mr. John Taylor, President and Chief Executive Officer, National Community Reinvestment Coalition,  and Ms. Deborah Goldberg, Hurricane Relief Program Director, National Fair Housing Alliance.