The Day Ahead: Import Prices, Geithner on China, Treasury Auction, Beige Book, Fed Speak

Benchmark interest rates backed up overnight as equity futures approached their highest levels since September 2008.  This move is built on improved investor optimism regarding Europe’s fiscal crisis after  a pledge from Japan to purchase Euro debt was announced yesterday.

S&P 500 Futures are 7.75points higher at 1,278.25 and Dow Futures are up 59 points to 11,675. In the bond market, the 10 year note has broken through 3.36/37%  and is retesting positional support in the 3.40/42% area. 10s are currently -16/32 at 93-18 yielding 3.40%, which is the middle of the recent trading range. The February FNCL 4.5 has opened -8/32 at 102-01.

Economists at BMO Capital Markets note that Portugal’s bond auction yesterday was “somewhat better than expected, with borrowing costs easing and demand at the high end of an expected range.”

However, they expressed reservations about the rest of the week.

“This removes some pressure on the country to seek a bailout, but investors remain worried that borrowing costs remain unsustainably high and that Portugal will need to seek aid. As well, the bigger test of investor confidence could be Spain and Italy’s debt auctions tomorrow.” 

Meanwhile, mortgage purchase applications fell 3.7% in the first week of the New Year, but overall loan application volume nonetheless increased thanks to an advance of refinancings, according to the latest weekly MBA Mortgage Applications Index. 

The average interest rate for a 30-year fixed-rate mortgage fell four basis points to 4.78%, spurring homeowners to lock in at better rates. Refinances increased 4.9% in the week, helping the overall index climb 2.2%.

The four-week average of the index remains down 5.3%.

“In a discouraging sign for the home sales outlook, the nascent recovery in purchase applications has recently stalled,” said economists at Nomura Global Economics prior to the release. “Unless the improving trend from late November returns, we may need to lower some of our home sales forecasts.”

Key Events Today:

8:30 ― Timothy Geithner, Treasury Secretary, speaks on the U.S.-China economic relationship.

“Look for him to maintain pressure on China to step-up the yuan’s appreciation, with the currency rising 3.3% against the dollar since it began ‘floating’ again in the middle of last year,” said economists at BMO Capital Markets, noting that China’s President visits Washington next week.

8:30 ― Another glimpse of the state of the economy will come in the form of import prices. They are expected to have risen 1.2 percent in December and continue a firming trend after November's 1.3 percent increase. Estimates by a Reuters poll of 42 economists ranged from gains of 0.6 percent to one of 1.7 percent. Petroleum prices are seen offering a boost to the headline figure as price gains were seen through December. Natural gas prices recovered from lows, suggesting fuels may also make a positive contribution.

2:00 ― The Federal Reserve’s Beige Book, an anecdotal look at the economy compiled by each of the central bank’s 12 districts, is expected to report gradual improvement in the economy. The last report, released on December 1, reported that ten districts had seen a modest or a stronger recovery, and just two districts reported mixed conditions. By contrast, the summer was described as showing “widespread signs of deceleration.”

“Given the broad-based pickup in activity over the last two months, we think this Beige Book is likely to sound considerably more upbeat,” said economists at Nomura Global Economics. “This is supported by the recent FOMC minutes, which noted that the Fed's business contacts ‘had become more optimistic about the outlook for sales and production’.

“We expect the report to indicate that the economy gained momentum during the period, and that labor market conditions firmed. It will also be interesting to see if the Fed finds evidence of higher commodity prices passing-through into retail goods prices.”

1:00 ― Richard Fisher , president of the Dallas Fed, speaks on “The Limits of Monetary Policy” before a Manhattan Institute luncheon.

2:00 ― The monthly gap in the Treasury’s Budget Statement for December is expected to be $85 billion, following a deficit of $150 billion one month before. Estimates from the nine economists polled by Reuters range from $85 billion to $165 billion.

“We expect the Treasury to report a budget deficit of $85bn for December, down slightly from last year because of improving tax revenues,” said the forecasting team from Nomura.

• Treasury Auctions:
• 1:00 ― 10-Year Notes ($21 billion)