The Day Ahead: Trade Balance, 10-Year Note Auction, Treasury Budget

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Good Morning.

Stock futures are weaker and interest rates are rallying, led by the long end of the yield curve.

Ahead of Trade Balance Data...

S&P 500 futures are -16.25 at 1103.75. The 2-year TSY note is 1.2bps lower at 0.513%. The 10-year note yield is 3.6bps lower and rate sheet influential MBS prices are higher. The September Delivery FNCL 4.0 is +0-05 at 102-22 and the FNCL 4.5 is +0-03 at 104-22.

Key Events in the Day Ahead

8:30 ― The Trade Balance is expected to narrow slightly after the monthly deficit expanded to $42.3 billion in May. Economists polled by Reuters look for a June deficit of $42.0 billion, though forecasts range widely from $38 billion to $46.2 billion. In the prior month, exports and imports both rose, but imports outpaced exports by five percentage points despite petroleum imports declining.

“The deficit has grown significantly from its low of -$24.9 billion in May 2009, but is still well below pre-crisis levels,” noted economists at BBVA, who anticipate a widening of the deficit in June. “The strong pace of import growth reflects a strengthening in domestic demand . . . If June’s import data comes in below expectations, the negative contribution of net exports could be smaller in the next GDP release.”

Meantime, economists at IHS Global Insight said imports is the key category to watch, while exports should remain unchanged. They predict a $44 billion gap in June.

“The burst of imports associated with re-stocking is probably reaching its climax ... since underlying final sales growth remains weak and firms will want to avoid an excessive inventory build-up,” they predicted. “Note that the Commerce Department assumed an even bigger widening in the June trade gap in its initial estimate of second-quarter GDP, so an outcome in line with our projection would prop up second-quarter growth.”

2:00 ― The Treasury’s Budget Statement is expected to show the federal government overspent by $169 billion in July, versus a monthly deficit of $181 billion in the same month one year ago, according to Reuters. Those figures are more the double the average July deficit of $81.3 billion over the past 5 years, according to Bloomberg. In June, the fiscal year-to-date gap worsened to more than $1 trillion.

“Thanks to a gradual recovery in tax income the federal budget balance is expected to improve in July from a year ago,” said economists at Nomura.

Treasury Auctions:

  • 1:00 ― 10-Year Notes