The Day Ahead: Bond Markets Rally In Early Trading

The bellwether 10-year Treasury remained stable at 3.62% on Wednesday. Overnight it firmed one basis point to 3.61%. The two-year note currently yields 0.84% and the 30-year offers 4.67%.

Equity futures offer no direction this morning while the market ignores developments in Bahrain and Libya and looks forward to fresh data on inflation, the labor market, and a series of outlooks from Federal Reserve officials including chairman Ben Bernanke.

S&P 500 futures are down 0.8 points from a 32-month high to 1,332.20, while Dow futures are trading 2 points lower at 12,250.

The S&P 500 has roughly doubled for its March 2009 low, but remains 17% below its all-time high in October 2007, say economists at BMO Capital Markets. 

Commodity prices are mixed. Light crude oil is 0.34% down at $84.70 per barrel, while gold prices are 0.24% higher at $1,378.40 per ounce, and natural gas prices are 0.26% higher at $3.93 per MMBtu.

Key Events Today:

8:30 - The Consumer Price Index is anticipated to move upwards by 0.3% in January, averaging out from the 0.5% gain in December and the 0.1% increase in November. A 9.5% surge in energy prices was the culprit for December's gain, but even so the yearly rate was just 1.5%, well below the Fed's preferred 2% rate. Core prices, which exclude volatile energy and food components, continue to be moderate. The core index is forecast at a modest 0.1% in January, the same as in December, which followed three months of no gains.

"Aggressive discounting should keep core consumer prices unchanged in the month, though the yearly rate likely edged higher to 0.9%," said economists at BMO. "While up from October's all-time low of 0.6%, the core rate is still about one percentage-point below the Fed's long-run 'target'. Meantime, rising gasoline and food costs could kick the headline CPI rate up a couple of tenths to 1.7%."

8:30 - The closely-watched Initial Jobless Claims survey has been too volatile to be of much use recently. For the week ending Feb 12, economists look for 410k new claims, 27k higher than in the previous week and broadly in line with the 415k four-week average. The last week's headline number was surprisingly low as claims fell 36k in the week to the lowest level since early July 2008. The Labor Department indicated the cold weather and seasonal adjustment issues were playing a role in the recent figures.

To avoid the week to week volatility, economists at BTMU took a look at much broader trends. 

"In 2009 claims averaged 572,000 compared to 418,000 in 2008, which was the 

largest annual jump in claims since 1974, but fell back to average 457,000 

in 2010," they wrote. "Thus far in 2011 claims are averaging 405,000."

10:00 - Ben Bernanke, chairman of the Federal Reserve, testifies before Senate Banking Committee on Dodd-Frank reforms, alongside SEC Chair Mary Schapiro, FDIC Chair Sheila Bair, and CFTC ChairGary Gensler, in Washington.

10:00 - Leading Economic Indicators, a composite index designed to measure turning points in the economy, is expected to rise for the seventh straight month in January. The bad news: the index is rise 0.2%, versus a 1% gain in December a 1.1% boost a month before. Also, economists from BMO point out that the year-to-year comparisons have been shrinking in recent months, and the impressive 1% gain in December was largely attributable to a single component (building permits).

"The biggest drag on the index comes from a steep decline in building permits," said economists from Nomura Global Economics, who anticipate a 0.1% gain overall and a big reversal among building permits. "The decline in the average manufacturing workweek and the rise in the moving average of initial jobless claims are other negative contributors to the index."

10:00 - The Philadelphia Fed Index is expected to grow at a steady rate for the third consecutive month in February. Economists look for a score of 22, up from 19.3 in January and 20.8 in December. The three months of growth follow a slight increase of 1.2 in October and a contraction in late summer. New orders, an indicator of future activity, more than doubled in January to 23.6 - the strongest reading since September 2004. Shipments, an indicator of current activity, also more than doubled to 13.4.

"Like the Empire State index, we expect the Philly Fed report to show a modest gain in overall activity," said economists at Nomura Global Economics. "We will be closely watching the 'prices received' index for evidence of commodity price pass-through."

11:30 - Dennis Lockhart, president of the Atlanta Fed, asks questions of Irish Ambassador Michael Collins at a World Affairs Council discussion in Atlanta.

1:10 - Richard Fisher, president of the Dallas Fed, speaks on the economy and the Fed at a community forum in Houston.

1:20 - Charles Evans, president of the Chicago Fed, speaks on the economic outlook to the Rockford Chamber of Commerce in Rockford, Ill.

Treasury Auctions:

1:00 - 30-Year TIPS