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The Treasury market was only modestly weaker in the early action this morning and we suspect that pressure continues to be primarily the result of an ongoing positive bias in equity prices. With the scheduled data in the prior trading session mostly stronger than expected and the PPI report clearly much hotter than expected, it was not surprising to see bonds and notes come under aggressive selling pressure yesterday. Since the trade doesn’t expect the CPI readings today, to show as much inflation as the PPI report yesterday and the trade is also expecting generally soft Industrial Production and Capacity Utilization readings, it is possible that some of the downward tilt in Treasury prices will be curtailed. In fact, if it were not for the better than expected Intel earnings and the definitive upward extension in the equity markets overnight, we would discount the bear case completely today. On the other hand, the market will also see a New York Fed manufacturing survey reading and that in conjunction with the lingering weakness in the broad based Industrial Production readings could be hard to ignore in the early going.
We might add that the market fell yesterday, despite the presence of another Fed quantitative easing buying effort in the 2 and 3 year maturities. If the stock market were to fall back that could shift the balance of power in the Treasury market, but without that outside market benefit, we doubt that the bear camp will be able to completely play down the blow out Goldman earnings, the better than expected Intel results and perhaps most importantly, the rather hot US inflation readings. Therefore it might be possible to see a weak rally in the wake of the Industrial Production and Capacity Utilization readings, but before the market gets to those potentially supportive data points, it is possible that CPI and early equity market action will have pushed Treasury prices back toward the prior session’s low.
The market will also get a look at the last FOMC meeting minutes later in the trading session today and it is possible that the market will be looking for some sign of increased Treasury buying interest from the Fed in those meeting minutes. We see resistance in September bonds early today at 118-23, with similar resistance pegged at 117-25 in September Notes. In conclusion, we expect the trend to remain down, unless the Industrial Production readings are much worse than expected and the stock market falls into negative territory. Near term downside targeting in the September Bonds is seen at 117-31, with similar downside targeting in September Notes pegged at 117-12.
