The Day Ahead: Treasury Sell-Off Extends. Risk On

Treasuries continue to back up as investors bet on equities making a rebound.

The benchmark 10-year Treasury is yielding 3.19% in early trading, versus 3.17% at yesterday's close and 3.09% this time yesterday. The 30-year yield is at 4.306%, up from 4.29% at yesterday's close. Mortgages are following Treasuries lower. The FNCL 4.0 is -2/32 at 99-30 and the FNCL 4.5 is UNCH at 103-08.

Economists at BMO Capital Markets say investor sentiment is more upbeat this morning despite news that IMF chief Dominique Strauss-Kahn is resigning, while Japan is back in recession for the third time since 2000.

"Even the EUR is a touch stronger despite warnings from the ECB that any restructuring of Greek debt would make it impossible for the bonds to be used as collateral," they wrote.

S&P 500 futures are 4.00 points higher at 1,342.50, building upon the 11.75 point gain Wednesday. Dow futures are 37 points up at 12,569, having climbed 81 points last session. 

Light crude oil is back in triple-digits after prices rose 0.19% overnight to $100.27 per barrel, while gold prices are up another percentage point to $1,495.80 per ounce.

The Day Ahead:

8:30 - Initial Jobless Claims have come in above the 400k mark the past five consecutive weeks and despite a 44k drop to 434k in the first week of May, the four-week average actually increased to 436,750. The data is at odds with the latest payroll results, so economists at watching the numbers closely to determine if there are underlying problems in the market or if claims are elevated due to seasonal and regional mishaps.

"Throughout April and into May, a series of special factors boosted the figure, making the underlying trend difficult to decipher," said analysts at Citigroup. "We will be monitoring alternative measures of employment to determine if the rise in jobless claims is a true signal of emerging labor market weakness. Separately, the number of beneficiaries was virtually unchanged during its reference week, keeping the insured unemployment rate at 3.0%."

10:00 - Existing Home Sales are on the mend as investors and first-time homebuyers take advantage of median prices that are nearly 6% cheaper than one year ago. Investors bought 22% of all homes sold in March, helping the annual pace of sales tick up to 5.1 million from 4.92 million a month before. The April report is anticipated to see further improvement to 5.2 million, with estimates ranging from 5 to 5.35 million.

"We are projecting that existing home sales will rise in April, based on the 5% increase in the Pending Home Sales Index in March," said the forecasting team at IHS Global Insight. "Demand for homes picked up in March and April as buyers attempted to avoid higher insurance premiums imposed on FHA loans on April 18. This surge will result in higher closings in April, and possibly also in May, followed by a sharp drop off."

10:00 - Forecasts for the Philadelphia Fed Index are surprisingly wide, but a look at the recent numbers shows why. The report last posted a score of 18.5; on its own that looks stable, but it was actually a massive drop from a previous 43.4 - a 27-year high. The "consensus" this month is 18, but forecasts range from 10 to 28.

"We did not understand the big rise so the drop off did not come as a surprise," said analysts at Citi. "Since we see the lower April reading as representative of underlying activity, we do not anticipate much change in May."

"We expect a rebound of 6.5 points in the Philly Fed index to 25 in May," said economists at Nomura. "The months of record high manufacturing indices may have passed, but manufacturing remains a source of economic vitality in 2011. Even if regional surveys moderate, they are likely to signal continuing growth in manufacturing in the months ahead."

10:00 - Leading Economic Indicators, a composite of forward-looking data that seeks to track turning points in the economy, is anticipated to post a meagre 0.1% uptick in April. This follows gains of 0.6% and 1% in the prior two months. The recent jump in jobless claims is one reason the LEI should slow down, alongside declining vendor performance (as reported in the ISM manufacturing index). 

Economists at Citi look for the LEI to fall 0.1% in the month - the last negative reading was June 2010.

"Permit issuance softened, the factory workweek shortened and new orders gauges declined," Citi wrote, noting six of the 10 categories fell recently. "Consumer expectations and financial market indicators probably were the only positive contributors. Away from the outsized contribution from the yield curve, the index would have fallen by 0.4%."

11:00 - Treasury announces the terms of 2-yr, 5-yr, and 7-yr debt supply to be auctioned in the following week.

Treasury Auctions:
1:00 - 10-Year TIPS