The Day Ahead: Reasonable Economic Calendar Overshadowed by EU Soap Opera

MBS moved steadily higher for most of yesterday's session, while 10yr yields and stocks moved lower.  MBS hit 103-29 in fannie 3.5's, which is a resistance level to watch today, along with 103-18 support and 103-23 as a reasonably well-traveled middle ground.  10's move primarily around a pivot centered on 1.95%.  The standard-issue "risk-off" trading patterns began after a weaker-than expected Retail Sales report (+0.4 vs +0.7 consensus).  Then the European news kicked in.  The Eurogroup meeting that had been looming as today's main event,  "turned into" a conference call, with officials stating that Greece didn't have all the required paperwork ready.

Markets also learned that Greek party leader Samaras hadn't locked in his "final answer" by committing recently approved austerity measures to Greece's lenders.  We didn't know that it was a two part process where Greek leaders could apparently accept austerity on one day and then reneg the next.  But that's at moot point as Samaras changed his tune late in the day anyway, saying that he would provide a commitment to lenders.  This reversed some of the earlier bond market bullishness and was the most salient turning point of the day.

In overnight news, the ECB has another crafty idea to work around their treaty (which prevents them from directly lending to member states).  Newswires late yesterday indicated the ECB could forgo a profit on their Greek debt and return the balance to member states, who could in turn use those funds to cushion the Greek bailout.  Essentially the ECB would be taking an action that directly results in less debt for a member state.  The effect is the same as the "direct lending" to which they're so opposed.  If this happens, we expect a briefcase full of cash could even be delivered to Greece by an animal that walks and quacks like a duck.

On The Agenda Today

- NY Fed Manufacturing at 8:30am, expected to have risen from 13.48 to 15.0 - moderate importance, and lessened by Greek drama

- Treasury International Capital at 9:00am which shows the level of foreign investment in US Treasuries.  Particularly, markets are interested in tracking long-term changes in foreign holdings, especially net inflow or outflow among major holders such as China, Japan, and the UK.  Very backward looking, covering December.  Not usually a big market mover in the short term and it's importance is also lessened by Greek drama

- Industrial Production and Capacity Utilization at 9:15am, both expected to have risen slightly - moderate importance, and lessened by Greek drama

- NAHB Housing Market Index, expected up from 25 to 26, and not a significant market mover regardless of its deviation from expectations, and even then, and lessened by Greek drama

- Bottom line, markets are waiting to see what comes out of the Greek Conference call with the Eurogroup.  We've heard 1600GMT (Noon EDT) as a target time for this call, but have no idea if that's a hard and fast time, or even that it will take place at all!  If it goes off as advertised, with Greece clinching bailout funds, we'd be shocked, markets would be shocked, and bonds will probably tank.  As it stands, there's an increasing amount of skepticism over things getting done as advertised when it comes to patching up the more grievously wounded sovereign economies in the EU periphery.