The Day Ahead: Euro Debt Crisis Creating Waves, Wholesale Trade, Class A MBS Roll

Equity futures are on the rise and interest rates are backing up a bit after news hit wires that Japan is planning to buy European debt in an effort to boost investor confidence in the region.

“Japanese Finance Minister Yoshihiko Noda said Tokyo was considering using its euro reserves to buy about 20% of the AAA-rated bonds to be jointly issued by the euro zone to raise funds to support Ireland,” Reuters reported.

While Asian stocks had a mixed session, European equities promptly rose about 1% on the announcement. London’s FTSE 100 is currently up 1.21%, while Germany's DAX  is trading 0.78% higher.

In the U.S., S&P 500 Futures are rebounding 5.50 points to 1,271.00 and Dow Futures are up 59 points to 11,646. Year to date the indexes are up 0.96% and 0.52%, respectively.

Both stocks and bonds rallied as London opened, but the 10 year TSY note has begun to retrace some of its overnight gains ahead of the U.S. session.  The 2.625% coupon bearing 10-year TSY note is 2/32 at 94-13 yielding 3.293%...still below 3.30%. Trading volumes weren't huge in the overseas session but activity did pick up as Japan returned from holiday. 150k 10 year TSY futures contracts had traded as of 7:45am.

Commodity prices are generally higher, with light crude oil trading 0.64% higher $89.82 per barrel while gold prices up up 0.64% to $1,383.25.

The day ahead is relatively light on data, though three officials from the Federal Reserve are in queue to speak on the economy, the FRBNY will conduct a QEII open market operation at 10:15, and Treasury will auction $32 billion 3-year notes.   Beyond that, today is Class A Notification Day in the TBA MBS market (the roll).

Key Events Today:

8:30 ― Charles Plosser, president of the Philadelphia Fed, speaks on the economic outlook to the RMA Philadelphia Chapter meeting.

10:00 ― November’s Wholesale Trade report is anticipated to show inventory and sales growth of 1.5% and 1%, respectively, following gains of 1.9% and 2.2% in the prior month. The gain in inventories is especially significant as the previous month’s rise beat consensus forecasts by a full percentage point and September’s gain was revised up to 2.1% from 1.5%. 

“Given that private inventories contributed 1.6 percentage points of the 2.6 annualized growth in 3Q10, markets will watch closely wholesale inventories,” said economists at BBVA. “Current trends indicate that wholesale inventories continued to increase in November.”

Economists from Nomura note that inventories have expanded at an annualized pace of 22% in the last three months ― the largest three month gain in the history of the series. 

“In our view, most of the recent increase reflects higher prices for the many commodity products passed through wholesalers ― oil, foodstuffs, metals, etc ― rather than an increase in real trade volumes,” they added. “This month we look for another big increase of 1.5% m-o-m.”

Meanwhile, Ian Shepherdson from High Frequency Economics warns not to be deceived by the headline, which he said merely reflects the rising price of petroleum and farm products.

“These increases will not affect the pace of real GDP growth,” he said. “We expect no further acceleration over the next few months . . . The inventory boost to GDP growth is over.”

10:15 ― Fed buys an estimated $7-9 billion in Treasury coupons maturing between 07/31/16 and 12/31/17.

1:00 ― Narayana Kocherlakota, president of the Minneapolis Fed, speaks before a luncheon hosted by the Wisconsin Banker's Association.

1:00 ― Treasury completes an auction of $32 billion 3-year notes.

6:00 ― John Weinberg, research director at the Richmond Fed, speaks on the economic outlook before Frederick County's 7th Annual Economic Symposium. 

Class A MBS coupons will begin the settlement process this afternoon. (Class A = 30 year Fannie and Freddie MBS coupons).