The Day Ahead: Stock Lever Pushing Rates Higher

Benchmark interest rates suffered yesterday as "flight to safety" funds were unwound from U.S. Treasuries and reallocated into equity markets.

Monday’s stock rally is extending into the first day of February after Exxon Mobil boasted a 53% jump in net earnings to $9.3 billion. Investors await the ISM Manufacturing report at 10am, alongside the latest construction spending figures.

Turmoil in the middle east continues to weigh on investors, but global markets rose overnight including a 1% gain in France’s CAC-40, a 1.05% gain in Germany's DAX, and a 1.00% gain in London on the FTSE.

“The upbeat mood follows yesterday’s strength in U.S. equities, and generally solid economic data out of Europe and Asia ― South Korean exports rose 46% y/y, the fastest pace in 22 years,” said economists at BMO Capital Markets. 

S&P 500 futures are 8.00 points higher at 1,290.50 and Dow futures are 49 points higher at 11,889. The stock lever is exerting originator unfriendly pressure on interest rates. The benchmark 10 year Treasury note is -16/32 at 93-10 yielding 3.434%. The FNCL 4.5 is -9/32 at 101-31.

Light crude oil is trading 0.61% lower at $91.63 per barrel, while gold prices are 0.68% higher at $1,340.97 per ounce. Brent Crude Oil, which must pass through Egypt's Suez Canal, is still bid over $100/barrel.  With equities higher, the US$ index is weaker this morning and trades at the lowest level in 10 weeks, according to BMO.

Key Events Today:

10:00 ― The ISM Manufacturing Index, the nation’s key report on manufacturing, is expected to move up 0.5 points from the December score of 57.0 ― the highest level in seven months. Forecasts are in a relatively tight range of 56.5 to 59.5, with any score above 50 indicating growth in the sector. The employment component will be key in light of two items: a) in December it dropped to nearly two points to 55.7; and b) everyone is looking ahead to Friday’s nonfarm payrolls report.

“[This index] increased in the last 6 consecutive months and has been higher than 50 since August 2009, indicating that manufacturing activity is expanding compared to the previous month,” said economists at BBVA. “Regional Fed’s manufacturing activity indices confirm that the manufacturing activity in the U.S. continues expanding.”

More broadly, economists at Deutsche Bank added: “We remain positive on the manufacturing outlook in 2011 as rising auto demand and tax incentives for capital expenditures provide significant tailwinds for the sector.”

10:00 ― Construction Spending is forecast to rise a measly 0.2% in December, versus a 0.4% increase in November. Forecasts are deeply divided, with some economists looking for a drop as big as -0.9%. The potential culprit was an unusually cold December, as suggested by the drop in residential construction of new homes. A negative print would break a three-month trend.

“Construction spending increased 0.8% on average in the last three months,” noted economists at BBVA. “We expect that construction spending increased slightly due to relative improvement in real estate industry. Since the construction spending data is released with a long lag, the market reaction could be limited, yet it would help us understand current conditions in both the residential and nonresidential construction industry.”

10:15 ― Fed buys an estimated $1-2 billion in Treasury TIPS maturing between 4/15/2013 and 2/15/2040