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The Treasury market remains vulnerable after the change in sentiment in the prior trading session. Apparently the up tick in the NAHB Index yesterday combined with some favorable international economic readings to rekindle optimism toward the economy. Certainly seeing the equity market “seemingly” resume an upward bias yesterday added to the revived view on the economy and clearly the Treasury bears will have to see something positive from the Housing Starts and Permits data this morning to facilitate more declines. With the trade and press mostly expecting some type of positive readings from the Housing sector this morning and the downside extension seen in the prior trading session, it is possible that part of a positive number is baked into the market already. With Lowe’s posting positive earnings news in the prior trading session that also seemed to play into the revived economic view and given the equally favorable Home Depot earnings this morning that should add to the newfound downward bias In Treasuries. With the recovery currencies, the Pound, Canadian and Aussie all showing noted strength this week and the German ZEW economic expectations rising sharply for the month of May overnight, it would appear that even international influences are favoring the bear camp. However, since the Treasury won’t announce a series of Note sales for next week, until Thursday, the presence of supply flow is only partially in the face of the market today. All things considered, it would appear that the June bonds are headed down to the next support zone of 121-00, with similar downside support seen in the June Notes down at 119-22. In the event that the June S&P manages a rise above 915.20 today that could turn up the pressure in the June bonds and perhaps press June bond prices down to the next lower and more critical support point at 120-14. Secondary support in the June Note market comes in down at 119-28. In the action this morning, we assume that the path of least resistance is pointing downward, but there is a risk that some players have factored in at least a 3% to 5% gain in both housing starts and housing permits. In other words, some players have put a pretty high bar in place for the US housing numbers already and any disappointment in those readings this morning would probably trip up the stock market and in turn take some of the steam out of the bear’s case in the Treasury market. There might not be a middle ground for the market today, as strong housing numbers really put down the recent concern of a return to slowing, while a weak number probably allows some economic doubt to return. In short, the bias is down but the bear camp probably won’t handle a rise back above 122-00 in the June bonds very well today.
