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Despite the rather impressive run up in equity prices in the prior trading session, US Treasury prices managed another slight new high for the move in the overnight action. With the overnight rise coming in the wake of a noted rally attempt in equities in the prior trading session, it would appear that the Treasury market has settled into a bullish bias this week. Perhaps dialogue from the Fed reassured the markets that the Fed was monitoring the inflation threat and that the Fed currently doesn’t see any inflation. It is also very likely that the surprise minor decline in the US NAHB Index rekindled some slowing fears and served to lift Treasury prices in the process. In fact, there is apparently rising anxiety on the impact of the expiration of the first time home buyers tax credit, as many analysts think that the US housing market lacks the capacity to stand on its own two feet. With the US PPI report today seeing some estimates that call for a contraction in the PPI headline reading, one could make an argument that inflation prospects will indeed remain muted. However, with December crude oil prices recently forging a rise above the $80.00 level, December copper prices threatening a breakout above the $3.00 level and December gold sitting just under its historic highs of $1,072 there are plenty of market signs of inflation. In the near term the Treasury market seems to be buying into the Fed’s interpretation and with the NAHB Index (the first US report of this week) coming in soft and the US Housing Starts and Permits reports due out this morning, the trade will be set to take away a lot of information from the US housing sector.

With the White House recently moving to bolster states funds in the battle against ongoing home foreclosures, it would certainly seem like the real estate sector remains in the midst of a serious battle. Therefore, the market looks to be poised to rally off the slightest undershoot on the Housing Starts and Permits report. It is somewhat impressive that the Treasury market absorbed or mostly discounted the New York Fed’s move to test reverse repos, as the trade could have taken that as a sign that the Fed was preparing to remove some stimulus from the marketplace. However, the NY Fed was quick to reiterate that the reverse repo action was simply a test to see if the mechanism worked and that it wasn’t ready any time soon to implement the quasi tightening maneuver.

We suspect that December bonds were seen as too cheap yesterday below the 120-00 level and that the soft NAHB reading justified the bounce and with anything even remotely supportive from the scheduled data flow this morning, the December bonds could climb to the next resistance zone of 120-17. As for December Notes, they seem to have fleshed out solid support at and slightly above the 118-00 level, with minimally weak US scheduled data flows today, probably providing a rise to the 118-15 level. In fact, the Treasury market doesn’t seem to be the least bit interested in the overt strength in equities and the favorable earnings flow, perhaps because they see ongoing trouble in US housing and even more gains in the US unemployment rate ahead. Another level that traders should look to for solid support, is uptrend channel support of 117-26 in December Notes, with that support level rising to 117-29 on Wednesday. Similar up trend channel support in December bonds is now seen at 118-26, with that level rising to 118-30 on Wednesday.

This content originated from – The Hightower Report.
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