The Day Ahead: GDP, Consumer Sentiment, and Euro Headline Potential

Volume in the overnight session was just under recent averages but respectable overall.  10yr Treasuries rose as high as 1.9681 after a relatively strong Italian debt auction.  Beyond that, there was no major driver of trade as it seems bond markets have opted to shy away from overly aggressive bullish breakouts and are perhaps waiting for this morning's GDP, next week's NFP, or resolution to Greek bond-swap talks that may come some time in between.  MBS are opening 2-3 ticks lower; S&P futures just slightly higher, but generally followed bond markets overnight.

The world economic forum in Davos continues.  The schedule is packed with what sound like meaningful events, such as a "panel debate on the future of the Euro-zone," but as always, we'll have to wait for potentially meaningful news to cross the wires and observe market reaction before drawing any conclusions.  If we had to guess at a top contender for market movement potential out of Davos, it would probably be ECB President Mario Draghi's speech on Europe's economic outlook and the steps needed to restore growth.  That's at 915am Eastern.

Other European news highlights :

Portugal is fighting a losing battle to contain its public debt and may be forced to impose haircuts of up to 50 percent on private creditors, according to a top German institute. - The Telegraph

Greece will continue negotiations with private bond-holders Into the weekend.  According to a Greek official, "The talks focused on legal and technical issues and progress was made. They will continue on Friday and probably on Saturday too." -Reuters

Barring any major shockers as far as European headlines are concerned, the focus of the day seems to be on the advance GDP for Q4, released at 830am.  It's expected to show a big uptick in growth to the tune of +3.0% with core PCE prices--the Fed's preferred inflation metric--seen rising 0.9% vs a previous 2.1%. 

After GDP, there's really only one piece of domestic economic data standing between traders and their weekends: University of Michigan/Thomson Reuters Consumer Sentiment at 9:55am.  Last reading was 74.0 and the consensus on Friday's reading is the same, although the "current conditions" component is expected to have risen very slightly.  Regardless of where this report prints, there's no denying a recently burgeoning sense of optimism in the domestic economic climate.  Markets may not be that surprised to see a beat, just as they didn't show much surprise at last week's rather outlying Jobless Claims number.  "Decent" domestic data has been increasingly taken in stride of late, and we'd wager bigger deviations from expectations are needed to outweigh various gorillas in the room--read: FOMC's recent changes and ongoing Euro-drama.

In terms of levels, MBS and Treasuries both had big 2-day double bounces at resistance levels (ceiling for MBS, floor for 10yr tsy's).  For Fannie 3.5's, that's a thin band of prices around 103-16.  Supportive pivots lay at 103-11, 103-06, and 103-00.  10yr yields hit 1.92 for a second time in two days (to be precise, 1.916 on Wednesday and 1.923 on Thursday).  Technical levels of note are all over the place depending who you ask, but 2 bounces in 2 days seems to suggest some sort of resistance event is taking place at 1.92.  Overhead, the 1.95 zone is noisy, but there's a long-standing and more clearly defined pivot at 1.98--think of that as the first line of defense if things go south--followed by 2.00.  On the other hand, if we're rallying, 1.87 and 1.84 seem like the first two likely pivots.  We have no idea where MBS would go from 103-16, but we do know that all time highs aren't far overhead at 103-29.