The Day Ahead: Rates Still Rising as Government Shutdown Looms

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Not much economic data is on the calendar today. Investors are focusing on whether Republicans and Democrats can find a last-minute compromise on this year's budget and avoid a costly government shut-down. According to CNN, operations of the Securities and Exchange Commission would be "extremely limited" if a shutdown occurs.

We don't see a short term spending bill reaching President Obama's desk today, meaning the government will likely shut down at midnight, but we do anticipate a Continuing Resolution to agreed upon by Monday morning. This is politics at their finest. S.O.P on Capitol Hill. WHAT WOULD AN EXTENDED GOVERNMENT SHUTDOWN MEAN FOR THE HOUSING MARKET?

Treasuries continued their unfriendly, technically driven trend and weakened further overnight as global equity markets rallied. The Shanghai Composite closed +0.74%, the Hang Sang added 0.47% and the Nikkei jumped 1.85% after another earthquake shook the northeastern shore of Japan, killing two people and knocking out power to millions  in the process. Below is our NIKKEI 225 chart with fibonacci retracements overlaid. As you can see those mathematical ratios are playing a key role in the technical recovery process of Japanese equities.  The 200 day moving average also presents a sizable hurdle in the day's ahead....

Even with a potential government shutdown looming, the Dow Jones Industrial Average rose 33 points (0.26%) in the first four days of the week and futures are now up an additional 53 points. S&P 500 futures are currently +6.25 points higher at 1,334.75.  The Dow has climbed 2.64% over the last month and 7.19% year-to-date.

The stock lever has not been a supportive influence on the bond market lately. This relationship is all about the uncertainty that pervades markets amidst the deluge of economic data, headline news, geopolitical risk, budget battles, Fed Policy speculation, Treasury auction supply, and market technicals ...just to name a few.

The benchmark 10-year yield backed up another five basis points to 3.60% last night. Trading volume on Globex was heavy into the price decline with over 300k 10s trading as of 8:25am. That is well-above average and indicative of liquidative selling. The long end of the yield curve led the move higher in rates. The 2s/10s curve is 2bps steeper at 278bps wide. The FNCL 4.5 is -8/32 at 101-04. Current coupon yield spreads are tighter but loan pricing is going to be worse this AM, barring a total turnaround in the next two hours.

The real headline in this market should be oil trading over $110/barrel yesterday and breaking through $111 last night. NYMEX light crude is currently +1.21% at $111.63. Rising oil prices fuel our call for another leg lower in interest rates as Main Street America sees spending money squeezed into the summer months.  Gold prices keep rising on inflationary concerns; overnight they rose 0.92% to $1,470.89.


Key Events Today:

8:00 - Dennis Lockhart, president of the Atlanta Fed, speaks on the economy and monetary policy to the University of Tennessee's Knoxville Economics Forum in Knoxville.

10:00 - Wholesale Inventories rose 1.1% in last month's report for January, a better-than-anticipated gain led by durable goods accumulation and a price effect from higher commodity prices on nondurable goods. February is expected to post another increase, albeit at a slower pace more in the range of +0.6%.

"The latest report indicates that wholesale inventories have increased by 0.9% on average month-over-month since the end of 2009," said economists at BBVA, citing the Census Bureau. "In February, wholesale inventories are expected to continue increasing due to a relatively low inventory-to-sales ratio. We expect that wholesalers will continue to replenish sold inventory in 2011 and the ratio will converge to its historical average of 1.25."