The Day Ahead: QEII Kickoff and Consumer Sentiment

Benchmark interest rates traded lower early in the overnight session but began to tick higher as London went to work around 3am.  Also, the tumble in stocks that took place yesterday continues this morning. Equity markets are pointing to a sharply lower open after equities in China fell more than 5%. 

S&P 500 futures, which dropped 5.2 points Thursday, are 6.50 points lower at 1,204.50. Dow futures, after falling 74 points Thursday, are 53 points lower at 11,189. Both indexes are however off their early morning lows.

As the Federal Reserve prepares to kick off QEII at 11am, the 5-year Treasury note is -6/32 at 99-31 yielding 1.252%. The 7-year note is -10/32 at 99/31 yielding 1.88%. The 10-year note is -6/32 at 99-19 yielding 2.67%. The January delivery FNCL 3.5 is -8/32 at 99-14 and the January FNCL 4.0 is -4/32 at 102-09.  MND's version of the secondary market current coupon is 3.557%.

After an aggressive rally on Wednesday afternoon following the release of the Fed's first QEII asset purchasing schedule, 10s were expected to confirm positive progress via a retest of higher yields.

Commodities are getting beat up. Light crude is -1.98% at 86.07/barrell. Gold is -1.56% at 1387.40. Silver is -2.77% at 26.98.

The sell-off in Asia was triggered by fears of an interest rate hike. A day earlier, China announced a higher-than-anticipated inflation rate of 4.4% y/y, prompting rumors of the hike in rates and reserve requirements.

The Shanghai index plummeted 5.16%, while shares in Hong Kong fell 1.93% and Japan’s Nikkei 225 lost 1.39%.

Key Events Today:

10:00 ― The Reuters / U of Michigan Consumer Sentiment index is expected to rise to 69.0 in mid-November from 67.7 at the end of October. Gains are always welcome, but with October’s score at a calendar year low, it will take more than a two-point gain to have analysts optimistic that consumers are ready to spend. Forecasters are hoping the recent rise in equities will play a key role in boosting optimism ― the benchmark S&P 500 has jumped almost 17% since Aug. 31. 

“The questions within the University of Michigan survey are geared more toward financial markets so sentiment should get a lift from the recent run-up in equities,” said Ellen Zentner at BMTU, noting that the first read on consumer sentiment each month carries the most market weight. 

While looking for an increase, Zentner also noted that the broadest BLS measure of unemployment, which includes discouraged workers, actually ticked higher in September to 17.1%, compared to 17.0% in September 2009.

Economists at BBVA said other recent macroeconomic has been more positive, including an increase in auto sales and bumps in manufacturing indexes. Those should help the index rise after falling for the previous two months.