The Day Ahead: Jobless Claims, LEI, Fed Speakers, Auction Terms

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Treasuries were mixed on Wednesday, with short maturities gaining a bit of ground while prices for longer assets dropped.  The 7- and 10-year maturities were the worst performers on the curve; while 30-year bonds closed lower, the 10-30 spread narrowed another 2 basis points.  The economic data was fairly friendly to bonds; CPI was lower than expected, and the Housing numbers (Starts and Permits) were horrible.  However, the Fed is getting more resistance to their QE2 plans, as four key Republicans signed a letter to Bernanke questioning the asset purchases.   However, most observers believe that it’s unlikely that the Fed would curtail the program prematurely.

Mortgages performed well, with strong gains in higher coupons triggered by a 17% drop in the MBA’s refi index.  Fannie 3.5s and 4s were up by about a tick, while 4.5s closed a quarter-point higher and bigger premiums did even better.

Equity investors are ready for a sharply higher open Thursday morning as the fate of Ireland is appearing more certain. After several days of flatly refusing financial assistance, Central Bank of Ireland Governor Patrick Honohan indicated that he would, after all, accept a little help: “a very substantial loan … tens of billions.”

No plan has been reached yet, but European Union and IMF officials are to begin talks in Dublin today.  The resulting clarity of the situation reversed equity declines from earlier in the week. In Asia, shares in China, Japan, and Hong Kong closed higher by 0.94%, 2.06%, and 1.82%, respectively. Stocks are currently up 1.38% in London and 1.60% in France.  Just over one hour before the opening bell in the U.S., S&P 500 futures are 12.25 points higher at 1,189.75 and Dow futures are 84 points higher at 11,079.

Strength in stocks has led to weakness in bonds. In light overnight trading flows, TSY yields are higher this morning and MBS prices are lower. The 5-year TSY note is -6/32 at 98-24 yielding 1.512%. The 10-year note is -11/32 at 97/14 yielding 2.923%. The 2s/10s curve is 2bps steeper at 242bps. The FNCL 4.0 is -7/32 at 101-15.

Key Events Today:


8:30 ― Initial Jobless Claims could finally begin to show fewer than 450k Americans looking for unemployment benefits on a weekly basis. In the week ending Nov. 6, claims fell 24k to 435k ― the lowest since mid-July ― sending the 4-week average down 10k to 447k. The consensus from Thomson Reuters economists is 440k. Forecasts range from 430k to 457k.

Two of the three lowest readings on initial jobless claims for the recovery period have come in the last three weeks, according to analysts at RDQ Economics.

“We may (and we stress may) be seeing a pickup in the pace of private sector job creation being signaled by these data,” the analysts said. “We think the economy is gaining momentum in the fourth quarter and we look for growth of around 3%.”

Economists at Nomura add that if claims hold below 440k for a second week, it would be an encouraging sign that the labor market is improving.

Also, the tally of continuing claims is anticipated to fall 6k to 4.295 million in the week ending November 6.

10:00 ― Leading Economic Indicators, a composite index meant to signal shifts in the direction of the economy, is forecast to rise 0.5% in October, up from 0.3% a month before. Predictions range from 0.2% to as high as 0.8%.

Economists at Nomura look for a 0.7% gain, which would be the largest monthly increase since March.

“The strong increase reflects improvements in stock prices, the real money supply and the continued steep level of the yield curve,” they wrote. “A small decline in the ISM's vendor performance measure should subtract from the leading index.”

10:00 ― The Philadelphia Fed Survey, the second regional manufacturing survey released each month, is predicted to be at 5.0 in November, reflecting pretty slow growth in the region. That compares with a 1.0 score a month before, and some forecasts are as high as 9.6, so there is hope for a turnaround.

“Relative to the nation as a whole, manufacturing activity in the Philadelphia Fed's district has been slow over the past few months,” said economists at Nomura, who said regional activity continues to be soft.

“The Fed's latest Beige Book said that ‘manufacturing activity continued to expand … The only exceptions were the Philadelphia and Richmond Districts, where activity softened,’ ” they noted. “We therefore expect only a modest improvement to 2.0 for November.”

1:00 ― Kevin Warsh, governor at the Federal Reserve, participates in "The Future of Financial Markets" panel before an Executives' Club of Chicago Global Leaders Luncheon.

1:30 ― Sandra Pianalto, president of the Cleveland Fed, speaks on “Current Economic and Monetary Policy Issues” at an event hosted at Case Western Reserve University.

1:30 ― Narayana Kocherlakota, president of the Minneapolis Fed, speaks on “Monetary Policy Actions and Fiscal Policy Substitutes” before the National Tax
Association's 103rd Annual Conference on Taxation.

4:30 ― Charles Plosser, president of the Philly Fed, delivers closing address at the Cato Institute's conference on asset bubbles and monetary policy in Washington.

QEII COUPON LIFT : At 10:15 the Fed buys an estimated $6-8 billion in TSYs maturing between 05/31/13 and 11/15/14

Treasury Debt Supply: Treasury announces the terms of 2yr, 5y, and 7r debt auctions to be held next week.