The Day Ahead: Final Greek Vote, Claims, Chicago PMI

It's the last day of the 2nd quarter and the Fed's 2nd Quantitative Easing program. And stocks and bonds are both off to a positive start as the Greek parliament, having accepted a five-year austerity plan on Wednesday, now prepares to vote on implementing those measures today.

The two-year Treasury yield is a two bps lower at 0.446%, the benchmark 10-year Treasury yield is 2.4bps lower at 3.09%, back inside the confines of the recent 2.90 to 3.10% range.   Mortgages are opening higher and but slightly wider. The Fannie Mae 4.0 MBS coupon is +4/32 at 100-10 (2 ticks wider according to MND's hedge ratios).

Among equities, the S&P 500 looks to open 2.50 points higher at 1,306.50 and the Dow is set to open 22 points higher at 12,240. From Monday to Wednesday, the S&P 500 jumped 39 points, or 3.07%.

Economic data has taken a back seat to global events all week long; today isn't likely to be an exception. Headline news is likely to take center-stage as the Greek Parliament will take a final vote on implementing newly agreed upon austerity measures.

Yesterday's vote represented a broad acceptance of a medium-term austerity plan, tomorrow Parliament will vote on individual clauses and the implementation strategy. While the market clearly baked in a "yes" vote today, tomorrow is a little less certain, but it does appear we'll see another yes vote once all is said and done. This should give the EU, ECB, and IMF enough confidence to free up the 5th installment of Greece's bailout funds.

Default avoided for now....but Greece is still "kicking the can down the road". These votes simply cover short-term funding shortages. Until bailout funds are paid back, without a huge uptick in GDP growth, Greece's solvency will be up in the air again in the future, and the market knows it. With many Greek lawmakers muttering under their breath about how unfair these austerity measure are...political gridlock is going to be an issue the next time Greece needs to pay the piper.

Regarding other events, the auction cycle that just passed played a key role in ushering 10yr yields to their highest limits of the recent range and pushing BestEx Mortgage Rate quotes upward. The next two days can either help to contain recent losses, thus reinforcing the range, OR give the recent losses a big bottle of helium, a pair of moon shoes, and wish them happy travels skyward (bad for rates). Domestic data begins with Jobless Claims at 830AM followed by Chicago PMI at 945AM. Between the two, the Fed’s Bullard will speak at 9AM

In his morning note, MND's Adam Quinones notes that open interest has fallen in both the 10yr futures contract and S&P futures this week. He explained that, "Lower open interest in TY tells us there's been liquidative position squaring of longs, but limited new position adding. A similar story can be told in stocks. Falling open interest into higher prices implies short covering has led the rally, not new position adding. This makes sense as stocks have trended lower since April and bonds have rallied for 2 of 3 months in the quarter. This week's price action stinks of quarter-end position balancing!  Until new longs are added in equities and new shorts are opened in Treasuries, this behavior will be a sign of short-term weakness. Still, there is reason to believe rates are headed higher over the next 10-20 days. 10s were way overbought and with this back up they're teetering on a technical breakdown and potential test of 3.20".

Key Events Today:

8:30 - Last week's Initial Jobless Claims report didn't bode well for the June payrolls figure, which is compiled based on data from that period. Weekly claims rose 9,000 to 429,000, with the four-week average at 426,250. In the survey week for May's disappointing payrolls report, the four-week average was 440,250. This week's survey is anticipated at 420,000 - it would mark the 12th week above the 400k level.

"A return to the sub-400k March readings seems unlikely in the near-term," said economists at Nomura. "In fact, early retooling (in June rather than July) in the auto manufacturing sector may temporarily boost claims in the weeks ahead."

9:00 - James Bullard, president of the St. Louis Fed, briefs reporters following a conference on quantitative easing in St. Louis.

9:45 - No rebound is expected in the Chicago Business Barometer for June. The index of manufacturing and services decline 11 points in May to 56.6, a score that indicates healthy expansion, but not a robust pace. With the new orders index sharply lower in that survey, and weakness evident in the regional manufacturing surveys, expectations are for another drop in June. The consensus is calling for a 53.

"The deep dives in the Philly Fed and Empire State business indexes signaled that manufacturing activity is slowing abruptly," said economists at Citigroup. "Chicago area activity had been much stronger than other regions and the nation as a whole, but the slowdown is affecting even that high-flying area. In addition, supply-chain issues stemming from the disaster in Japan probably have hurt motor vehicle and parts production."