The Day Ahead: Bonds Off to Rough Start. Jobless Claims and Pending Sales on Tap
Stock markets continue to rally Thursday morning ahead of key labor and housing data....and the bond market continues to suffer as a result.
Ninety minutes before the open, S&P 500 futures are 5.75 points higher at 1,210.25 and Dow futures are 45 points higher at 11,278. The rally follows in the tracks of global equities. In Asia, the Nikkei 225 closed 1.81% higher, while China’s Shanghai index moved 0.71% higher and shares in Hong Kong increased 0.86%. In Europe, where the market is still open, shares in London and France are up 0.93% and 0.86%, respectively.
Commodity prices are mixed. Light crude oil is -0.13% at $86.64 per barrel, while gold prices are up 0.10% at $1,388.80. Silver is +0.04% at 28.45.
Durations are extending in the bond market as the yield curve bear steepens. 2s/10s are another 3bps wider at 246bps. The 10yr note touched 3.02% moments ago and "rate sheet influential" MBS coupons are lower and wider. The December FNCL 4.0 is -17/32 at 99-29. With 4.0 MBS prices under water, the 4.50 becomes the next production coupon which implies 4.75% will soon be the par 30 year fixed mortgage rate.
Aside from new U.S. data, markets will be eyeing the European Central Bank’s press conference slated to begin at 8:30am. The meeting follows a policy announcement at 7:45am wherein the ECB left interest rates at a record low of 1%, as expected.
“ECB President Trichet has been adamant that the euro will come through this crisis and warned that ‘pundits are under-estimating the determination of governments,’” noted economists at BMO Capital Markets just before the policy announcement. “The fierce rally in equities over the past two days and the euro’s gains are at serious risk if the ECB disappoints. Now that Mr. Trichet has built up expectations of action, he shouldn’t disappoint or we could see sharp sell off in European peripheral debt, the euro and global equities.
Key Events Today:
8:30 ― Everyone will be looking at Jobless Claims this week. The last survey for the week ending Nov. 20 showed just 407,000 first-time claims for unemployment benefits, the lowest level since July 2008 ― a few months before the crash of Lehman Brothers. The 4-week average fell to 436,000, as three of the five lowest readings for 2010 were recorded in the last four weeks. Now, the forecast is to see 425k claims, with estimates ranging from 412k to to 470k.
“Jobless claims have definitively broken out of the range to the downside,” said Ian Shepherdson at High Frequency Economics. “Last week’s drop to 407k may have overdone the extent of the dip in the trend ― and we cannot be sure the Labor Department is right to say not special factors affected the data ― but this has been brewing for a while. … If sustained for a whole month, every 10k drop in weekly claims boosts payroll growth by about 25k.”
Economists at BTMU say a sustained figure below 450k suggests job growth at the national level.
10:00 ― The Pending Home Sales Index, which looks at contracts that have been signed but not finalized, is set to fall 1% in October. The September index fell 1.8%, accurately anticipating the 2.2% drop in existing home sales, which showed sales at a 4.43-million-unit annual rate. The National Association of Realtors blamed tight credit for hurting sales, and that’s unlikely to change soon.
“The index of pending home sales proved prescient last month in signaling the deterioration in existing home sales,” said economists at Nomura. “We think the index will remain quite for the time being, given the lack of growth in mortgage purchase applications.”