With a number of international markets closed overnight or thinned significantly because of lingering holiday action, the price action in Treasuries could be a bit choppy today. While the market seemed to go into the holiday Wednesday with a definitive expectation of more severe slowing ahead, it seems as if some markets on Wednesday were attempting to discount that view somewhat. On the other hand, early expectations for holiday sales (from Spending Pulse overnight) suggest that the holiday sales might have dropped by as much as 4%. With most European markets still closed for an extended holiday period this morning, about the only overnight direction comes from a slight gain in the Japanese stock market. In fact, despite the slightly positive action in the Japanese stock market overnight, the Japanese government cut their economic forecasts sharply overnight after seeing a very significant decline in Japanese manufacturing and industrial activity. The drop in Japanese Industrial output was, according to one press outlet, the largest drop on record and that highlights the spread of the slowdown to another ultra critical global economic zone.

There were also reports that luxury sales fell by up to 30% for the season, with online sales actually declining and that really has to damage macro economic sentiment given that the online retailing sector was a stalwart performer in the US economy over the last several years. All things considered, one has to expect more jobs cuts in the coming months and that in turn should provide a firm underpin for Treasury prices ahead.

In the mean time, the March Treasury Bond contract looks to have close-in support at a building consolidation zone just above 140-00, with similar support pegged in 126-18 in March Notes. However, in thin conditions it is possible that March bonds could temporarily fall back to lower support down at 139-11, with lower support in the March Notes pegged down at 126-00. Short term traders might point to a developing pattern of lower highs on the bond chart and that might clear the way for a bit of a sideways chop today.

Given the lack of fresh date flow today, the market will also be forced to take guidance from the US equity markets and perhaps from retailing sector dialogue in the press. The Treasury market could garner some support from the expectation of a series of US regional Fed manufacturing reports scheduled for Monday morning. We continue to look to the next noted rally to step into a combination play of buying multiple long term puts and attempting to finance or hedge that position with a long futures play. However, since we view the cost of the puts as the big risk in the trade, we will wait for a rally to implement the combination!

This content originated from – The Hightower Report.
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