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The Treasury market comes into the last trading day of the week sitting almost in the middle of this week’s trading range. With retail sales and a consumer sentiment reading capping off an extremely thin week of US economic reports the Treasury market will get some needed direction on the US economy. However, estimates for the reports today would seem to mirror the state of the economy, which seems to be mostly limping very slowly toward recovery. With the Nikkei managing a noted rise overnight and other equity markets making noted early gains the equity market action might end up being the swing factor for US Treasuries prices later today. In fact, with the S&P, in the very early Friday morning action, managing to reach another new high for the year, that could serve to limit Treasury prices in the face of a slightly softer US retail sales reading. In retrospect, the auction results this week were supportive to prices (even the 30 year bonds) and that clearly helped the market bounce up and away from this week’s lows, but that residual support probably dissipates today as the trade begins to look ahead to next week’s FOMC meeting. While analysts expect the US retail sales reading to post a minor decline, it would seem like the Press and portions of the trade are also poised to discount that decline as another number impacted by adverse February weather. Therefore, the number on its face might provide some initial support, but the capacity to bounce might be limited by ideas that the number doesn’t represent the real state of the US economy.

We are actually somewhat surprised that the Treasury market has been able to sustain the half point bounce off this week’s lows in the face of the new highs for the move in the Nasdaq and S&P in the early Friday morning trade. In the recent past, action in the equity markets seemed to exaggerate views on scheduled data, but unless the retail sales figures come in better than expectations this morning, favorable equity market action could have a difficult time spinning a negative retail sales reading, into a reading that depicts robust recovery action. However, the sentiment figures might take on added importance today, especially if they manage to post an improvement. In short, we can’t argue against an initial pulse up to close-in chart resistance of 116-21 in June bonds and to 116-26 in June Notes, but it could take a surprise rekindling of the Greek debt situation and or a major reversal in equities to give the bull camp definitive control over Treasury prices today. In fact, the Asian trade was seemingly trying to foster talk that the Fed meeting next week bring about some hawkish dialogue from the Fed and that would certainly temper recent claims that US policy would be on hold for a full 6 months. For today’s action, we have to think that the bull tilt will see its best trade in the lead up to the retail sales report, but given the markets capacity to discount soft readings because of the weather, one gets the feeling that the overall trend in the Treasury market is generally set to remain down.

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Apparently Treasury prices were lifted late Wednesday in the face of some initial weakness in global equity prices, but it is possible that prices might have been lifted by early reports of yet another earthquake ( centered in Taiwan). Clearly Treasuries were lifted in the wake of the Fed Beige book yesterday perhaps because the Fed merely acknowledged the impact of severe February weather on the numbers and that theme has been offered up as an impact on the Friday numbers. However, the Fed Beige Book also noted growth across most Fed sections even though they made note of the weather impact. With the additional commentary that “layoffs slowed” and that hiring plans were anemic, that probably signaled to the market that the US jobs sector remains weak and with the key monthly reading just ahead, that prompted the Treasury market to recover and perhaps to see some fresh outright buying for a speculative play on the Friday payroll reports. We also think that renewed talk about the “Volcker Rule” rekindles some concern that Treasuries might once again be one of the few investments available to Banks. It also seems as if the Greece situation is mostly under control overnight, as that country launched a debt offering today and the results early on seemed to be mostly OK and that could serve to drain some flight to quality buying interest from the Treasury market.

In looking ahead to the scheduled data flow today, the markets will see a very active flow of data, with the weekly claims data, Pending Home sales and Factory orders. There is also a US Productivity reading to be released today and we suspect that will be supportive to Treasuries, as the job market remains soft enough, that employers are continuing to squeeze out production from an aggressively trimmed work force. However, until there is a higher degree of uncertainty on the hike/no hike question, the Productivity reading shouldn’t be seen as an overly important reading. In the other reports, the trade seems to be expecting a modest gain in Factory Orders and also in Pending Home sales and that could be limiting for Treasury prices, but only if the claims data, released ahead of the second set of data, manages to show some declines.

In conclusion, we think that the claims data will be the most important data of the day, with the Pending Home sales report, the report that might be capable of providing the biggest surprise. Therefore, we think that the upside will remain limited by the data today, with the June bonds potentially finding it difficult to rise above 117-17 and Notes above the 117-18 level. In fact, if the claims data shows the type of declines predicted by some economists, the Treasury market could see a mostly bearish track throughout the morning trading session. We suspect that ranges might be narrowed later today due to the US Non Farm payroll report on Friday morning, unless of course the stock market takes out the Tuesday lows off some fresh disconcerting development.

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Treasuries seem to be capped off just under last week’s highs on the charts, but we suspect that the market will garner some support off the 3 Year Note auction results at mid session today. However, while investors have shown the most interest in the shorter end of the yield curve in recent auctions, the heavy amount of supply lumped into first tranche of supply today could reduce the potential of a distinctly favorable result. With the Dow falling below the psychological 10,000 level yesterday and seemingly set to remain below that level into the opening this morning, we suspect that the action in the equity markets is generally destined to provide some minor indirect pressure to Treasury prices in the early going today. Yesterday a Fed member suggested that they might begin some asset sales in the 2nd half of 2010, but he also added that the Fed might not begin to tighten until after beginning the asset sales. Therefore, the Fed seems to have indicated that rates are likely to remain on hold through mid year.

With the economic report slate today somewhat thin (except for a Wholesale trade release) there shouldn’t be that much fresh news on the condition of the US economy. At least ahead of the auction, the March bonds look to have resistance up at 119-11, with similar early resistance in March Notes ahead of the auction seen at 118-23. Even though the Treasuries might show some initial weakness this morning we suspect that overall conditions are going to continue to favor the bull camp and that the auction results will add to the bullish tilt later on in the session. Apparently some early recovery bounce type action in US equities is applying some initial pressure to Treasury prices, but we would think that March bonds will find some buying interest around the 118-22 level, with a similar buying support level in March Notes seen around 118-11. In fact, despite the attempt to recover in the equity markets, the Press and trade still see to be fostering concerns toward EU debt. With a German CPI reading overnight actually posting a decline of 0.6%, it would certainly seem like economic activity in Germany remains suspect and that could indirectly provide a minor amount of support to US Treasuries.

Even if the US equity market action promotes bearishness toward Treasury prices early, we suspect that the trade will wait until after the results of the Treasury auction is known at mid session, before they make a definitive play.

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It would appear that last week’s lows have become a little more entrenched as some form of support in the wake of the sharp recoil from the recent lows especially in the wake of subsequent suggestions from the Fed that low rates will still be needed for an extended period of time. It is possible that the trade saw the extended string of declines in US Construction Spending report yesterday as a sign that pockets of noted weakness remain in the US economy.

With the Dollar showing more weakness this morning (but not too much weakness) it is possible that some foreign players are seeing US Treasury yields as attractive. With US pending home sales expected to be down this morning and Factory Orders expected to rise marginally, it is possible that Treasuries will be presented with a similar data flow as was seen in the prior trading session and yet prices were able to rally yesterday. However, the early potential to rally might be truncated quickly in the face of favorable US auto sales data that is due later in the trading session. We think that the trade is having second thoughts about keeping prices down hard into the non farm payroll report, as a March Note price sitting at 115-00, or a March Bond price down at 114-22 would probably result in a significant short covering rally in the face of any payroll gain in excess of the prior months -11,000 figure. However, the payroll report is a long way off in terms of market developments, with an active slate of data due in every day, upcoming supply terms to be announced and another round of initial and ongoing claims all scheduled before the monthly numbers take center stage.

We would suggest that traders monitor the correlation between a slightly weaker Dollar and marginally higher Treasury prices, as some foreign interests might be picking up some yield. While the December 29th Commitment of Traders with Options report for U.S. Treasury Bonds showed the Non-commercial position to be net short 101,474 contracts, with the Non-reportable position also net short 11,480 contracts, and that made the “combined” spec and fund position net short 112,954 contracts as of early last week, that reading is only marginally supportive to the market. Similarly the 10 Year Notes showed a “combined” spec and fund position that was net short 196,688 contracts as of early last week, which is a partially oversold condition, but certainly not an extreme positioning.

While we see the scope for a slight short covering bounce to perhaps the 116-00 level in March bonds and to 116-04 in March Notes, it is likely that the market will generally remain hemmed in ahead of the Friday payroll report. If fact, the short covering bias might have the edge, unless the scheduled numbers this morning both come in better than expected.

Perhaps some in the trade are looking ahead to the release of the FOMC meeting minutes on Wednesday, as many in the trade think that those minutes will continue to highlight a Fed that conclusively wants to keep the Fed funds rate down. With the Fed’s Duke reiterating the low rate mantra again yesterday that probably telegraphs the rest of the Fed’s intentions, especially since Duke suggested that the “FOMC” wanted to keep rates down. In conclusion, a minor short covering tilt is in place, as the market banks profits off the sharp December slide.

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The Treasury market managed another new high for the move in the prior trading session and has managed to hold all of those gains into the early Wednesday trade. Apparently strong demand for the 5 Year Note auction combined with a mostly slack sweep of US economic readings for a move to the highest level since October 9th. With a fresh new low in the Dollar and a fresh new record in the Gold market overnight there could be some countervailing pull on the Treasuries against their recent upward bias. However, we get the sense that the markets are mostly anticipating more slack economic readings ahead and a somewhat supportive 7 Year Note auction later this morning. While the 5 Year note auction went off much better than expectations, the trade doesn’t expect as much demand for the ($32 Billion) 7 Year auction later today.

Not surprisingly the Treasury market managed to discount a bit of potentially undermining news from the FOMC meeting minutes release yesterday afternoon, as it seemed as if the Fed was divided on whether it should employ asset sales efforts in the unwinding of its historical stimulus efforts. However, since the Fed seemed to be debating the style of unwinding, instead of discussing the timing of a start to the unwinding process, the Treasury market was at least initially unmoved by the “asset sale” discussion. Therefore a slightly upward track looks to remain in place into another rather active US economic report slate today.

With New Home sales, personal Spending/Income and Durable goods due out today, there will be no shortage of economic news to guide the market to more new highs for the move. While new home sales, Personal Spending and claims might weigh on the market, we suspect that Personal Income and durable goods will serve to countervail any liquidative tilt. In fact, without very large declines in initial and ongoing claims, we doubt that the bull camp will lose control over the trend in Treasury prices. While we don’t expect the market to forge a strong upward pulse, Treasuries might not even be undermined in the event that US equity prices forge a pre-holiday rally. However, with the recent slide in consumer confidence/sentiment, it is doubtful that the US equity market will be able to forge a pre-holiday rally.

Close-in support in December Bonds is seen at 121-10, with similar support seen at 120-00 in December Notes. With the US Treasuries undaunted in the face of a fresh new low in the US Dollar and the market seemingly poised to discount good economic readings and embrace slack readings, we see little in the way of resistance in December bonds until the 122-02 level. Near term upside targeting in the December notes is seen up at 120-15. To alter the uptrend bias, would probably require a 180 degree shift in a several US numbers, or some kind of official hint on when the Fed might be poised to begin unwinding its ultra loose policies. Given the pace of recent numbers, we still have to think that the Fed remains more concerned about slowing growth than it is of impending inflationary threats.

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With the bond markets closed due to a US holiday and nothing in the way of US economic reports due out today because of the holiday, the Treasury trade will be left to the electronic action. The market did see a decent auction result yesterday for the 10 year notes and that helped the markets forge another trading session just above critical support on the charts. The Treasury market could have been undermined by comments from the Fed, which were generally indicative of an economy in recovery, as that could begin to foster talk of when the Fed might be inclined to extract some easing from the equation. We suspect that firm equity prices and generally up beat macro economic psychology from international readings overnight is set to give the bear camp a slight edge in an extremely thin market condition today. With the UK overnight predicting that inflation would probably remain under control for the near future, that in turn might diffuse some of the light downward pressure on prices that is presenting in the early going today. We continue to see the 118-00 level as a key technical support zone in December bonds but since the market has temporarily violated that level 5 times in the last three weeks of trade, we can’t rule out a temporary slide down to 117-22, which is a recent key low. In addition to the up beat Fed dialogue, the IEA was also out yesterday with suggestions that massive amounts of oil investment were going to be needed in the coming years, just to offset a natural decline in global oil output and that could become a factor that serves to send oil prices soaring.

In the end, we see a weak downward bias today, especially if the equity market manages to extend the early pulse up move. On the other hand, we doubt that the market has the near term capacity to forge a noted downside breakout on the charts below what has become fairly significant consolidation support. We suspect that the Fed is ok with a very slow grinding rise in market perceptions toward interest rates but that they will probably step in to provide support if it appears that sentiment is forcing rates up too quickly. In the end expect a really tight trading range ahead.

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While the Treasury market seems to have lost some upside momentum this week, the December bonds also seem to have forged a quasi double top around the 121-27 level. However, the markets might lack the usual direction from the Asian markets this morning as the Chinese are on holiday.

There will be no holiday from the US scheduled data flow as today is an extremely active session, with two forms of reports on employment, readings on personal income & spending and more Fed dialogue. With the Non farm payroll report looming on Friday, the trade is likely to pay a lot of attention to a private jobs report and the initial claims Readings. We are somewhat surprised that the markets have been unable to sustain in new high ground, as the data was at best mixed and the Fed continues to predict that the recovery is going to take a very long time. We would think that the news of an end to the Saturn brand would spark increased attention on jobs losses into key US data ahead.

With the early equity market action somewhat soft today and a German retail sales report overnight showing weakness, there would appear to be lingering concern for the pace of the recovery. However, the Japanese Tankan survey overnight also showed another month of positive readings and that in turn probably countervails the IMF call overnight for more global stimulus to end the global recession.

While we assume the path of least resistance is pointing upward, seeing December bonds trading above 122-00, into the Friday report, could mean that anything even slightly better than expected will result in a moderate correction. However, after mostly favoring the bull tilt over the last six trading sessions, the Treasury market failed to get a noted run up off the larger than expected private jobs loss survey yesterday. With the Yield curve also steepening yesterday, that might also be putting the brakes on the bull track and for that reason, we suspect some bulls have temporarily lost their resolve. We also suspect that the market is squaring positions ahead of the report and that means a slight reversal of the upward bias of the last two weeks. In fact, some analysts this morning predicted a Non Farm payroll loss below the 200,000 level and that from a psychological perspective, would have the capacity to knock the December bonds back below critical close-in support on the charts of 120-25. Critical close-in support in December Notes is seen at 117-31 today.

With the markets basically accepting of an up tick in the unemployment report on Friday, it is possible that a weak number has been factored into prices already. While the markets will certainly “jump” in the face of a weaker than expected payroll reading, the rather narrow pace of gains over the last two weeks does seem to suggest that the reward of being long from above the prior session’s highs, might not be enough to weather upcoming risk.

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After another session of discounting seemingly bearish developments on Wednesday, the US Treasury markets appear to be showing some additional but marginal strength today. While we suspect the recent gains are coming partly because of the constant drum beat of suggestions that the global recovery will be a jobless recovery, it is also possible that some strength is being derived from the promise that low interest rates will be maintained. However, the Treasury market did exhibit some weakness in the wake of a strong US Industrial Production report that clearly got the attention of the markets. While there has been some talk about extracting the historic easing in place in the wake of the sub-prime crisis, the market has only given that argument passing attention this week. In fact, given the better than expected US number flow this week and the sharp rate of gain in equities, we would have expected December bonds to have streaked back below the September low of 117-18, with December Notes seeing a similar slide back down to 116-18 if there were distinct fears of tightening in the marketplace. In looking to the action today, the market will be faced with another rather active slate of economic data and perhaps even ideas that health care reform is poised to move forward. While the US data flow this morning might be partially offsetting (claims could be bullish, while Housing readings might be bearish) we would think that aggressive forward progress on the Health Care reform bill would eventually be seen as another budget busting threat for Treasuries. In the event that the trade begins to fear a rise in interest rates, we suspect that impact will be primarily seen in the long end of the market, as the short end of the market would seem to be set to remain in vogue longer than the other end of the yield curve. In fact, in the Asian trade last night there were indications that demand was surfacing on weakness in the short end of the market. In short, one might expect a slight rise in Treasuries the wake of the initial and ongoing claims data this morning, but that impetus will probably be very short lived if the Housing Starts and Permits data rise to or above expectations. With Asian equities showing strength again last night and the US data generally holding together we have to give the bull camp the ultimate edge, especially if the housing numbers this morning manage to come in above expectations. While it appears as if the Treasury market is hesitant to fall, the bears still look to have more ammunition than the bull camp today. In order to throw off our slightly bearish bias today, might require a rise back above 119-15 in December Bonds and or a move back above 117-08 in December Notes.

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The Treasury market starts the week out moderately below last week’s highs, but also moderately above the overnight low. While the market is set to face another wave of US supply this week, the amount of supply to be auctioned this week is markedly below some of the recent sales tallies. With $70 billion to be auctioned and $38 billion of that to come off today in 3 Year notes, the brunt of the auction supply will be seen in one tranche. We suspect that the G20 meeting provided a large portion of the bounce off the overnight lows, as several leaders made it clear that low interest rates and special easing were set to remain in place for the foreseeable future. While some Asian equity markets were showing positive action overnight, we suspect that will exert only minimal pressure on Treasury prices in the early action today. We also suspect that a fresh new low in the US Dollar overnight has discouraged some initial buying interest today, but the combination of a lower Dollar and weaker Treasury prices over the last three trading sessions could increase the foreign interest in the coming US Treasury auction cycle! It is possible that fresh new highs in the gold market is another force that is holding back the Treasury market, as gold prices above the psychological $1,000 an ounce level fosters the inflation outlook. Apparently traders in the gold market are being lifted by the slide in the Dollar, but it is also possible that the promise to leave interest rates and special easing in place from the G20m is serving to foster inflationary aspirations. From a technical perspective, the September 1st Commitment of Traders with Options report for U.S. Treasury Bonds showed the Non-commercial position to be net short 69,887 contracts, with the Non-reportable position net long 2,615 contracts and that made the “combined” spec and fund position net short 67,272 contracts as of early last week. With the net spec short positioning in bonds, falling to the lowest level since early 2008, one could come to the conclusion that the shorts are clearly doubting their positioning perhaps because of lingering employment concerns, but more than likely because the promise to engineer and entrench low global interest rates! Even the Note Market has worked its net spec short position down to just 131,096 contracts as of early last week and one could also suggest that bonds and notes now have less short covering capacity to lift Treasury prices than at any time over the last year. In the face of minor equity market gains ahead and ongoing merger and acquisition activity, the onus is on the bull camp to prove that Treasury prices aren’t in a downward track. In fact, it will take a strong auction result later this morning to propel December bonds back above the 120-00 level later today. We see initial resistance in December Bonds at 119-14, with similar resistance in December Notes seen at 117-12. Near term downside targeting in December bonds is seen at 116-29 but traders might expect some recovery attempt in the market into the mid day Treasury auction results! Near term downside targeting in December Notes is seen at 116-22 but like Bonds we would suggest that the trade expect a short covering bounce in the wake of the Treasury action late this morning.

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The Trend in Treasuries looks to remain up mostly off the sharp ongoing slide in equities. Apparently the markets are concerned about an extension of the slowing, in the wake of the slack US retail sales readings and the surprise decline in US sentiment figures at the end of last week. Since the declines in equities have now become notable that in turn has sparked a wave of safe haven buying of Treasuries. We suspect that the markets will be ultra sensitive to the NAHB Index and the New York Empire State Manufacturing survey early in the session today. However, in a somewhat strange twist of fate, we suspect that bonds and notes will rally unless both scheduled readings this morning are stronger than initial expectations. With both scheduled readings expected to be minimally above the prior month’s readings, the trade has partially baked into the cake, a gradual improvement in the economy. While the August 11th Commitment of Traders with Options report for U.S. Treasury Bonds showed the Non-commercial position to be net short 115,575 contracts, with the Non-reportable position net long 7,684 contracts, that made the “combined” spec and fund position net short 107,891 contracts as of early last week. The August 11th Commitment of Traders with Options report for US Treasury 10 Year Notes showed the Non-commercial position to be net short 83,744 contracts, with the Non-reportable position net short 109,241 contracts, and that made the “combined” spec and fund position net short 192,985 contracts as of early last week. However, with September bonds trading as much as 2 full points above the level where the COT report was calculated, we suspect that the net spec short reading in bonds is overstated but because the trade was still net spec short, one can’t rule out even more short covering buying ahead. In fact, with another US financial failure over the weekend, it is possible that fears of a second wave of financial failures is contributing to the upward bias in Treasury prices. In the near term, we can’t rule out a rally back above 120-00 in September bonds and above 118-00 in September Notes, as it could take a couple sessions before the disappointment from the economic front is tamped down. In fact, with a downside breakout in the S&P, putting stocks down to the lowest level since August 3rd, a return to the July highs in Treasuries is now possible. Fortunately for the bear camp in Treasuries, the majority of the weakness in equities is the result of expectations running ahead of reality, as opposed to real fears that the recovery has been lost.