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While the Treasury market looks to come in above the prior two closes on the charts, the trade is probably hesitant to drive prices sharply in either direction ahead of the FOMC statement that will be released later today. In fact, with the FOMC statement today expected to be accompanied by individual Fed member interest rate forecasts and perhaps by inflation targets, many traders might take a wait and see attitude. However, some Treasury market support might be present this morning from the Euro zone situation, which in turn might be fostered by the avalanche of Press commentary flowing from the Davos conference as that coverage has tended to focus on the negatives from Europe.

The US Treasury market garner some support from news that the UK 4th quarter GDP was negative and also because that reading was slightly below market expectations, as that in turn seemed to keep the fear of a global recession alive. On the other hand, the BOE MPC voted 9-0 to keep its QE efforts unchanged and they also suggested that there was a slightly reduced nearer term threat of a sharp contraction.

In looking ahead to the scheduled US data flows today, market expectations call for a minor contraction in pending home sales figures. Following the home sales release will be an 11:30 AM FOMC statement release, a mid day auction of $35 billion in 5 Year Notes and then a 1:15 Fed Press conference.

With the new format from the Fed offering additional information, it is difficult to predict the reaction in Treasury prices, especially with the rate and inflation forecasts lacking historical reference. Also due out today, is a report on mass layoffs, which could attract some attention, as the flow of scheduled data recently has been a little thin. At least for the coming 8 hours, the focus of the Treasury trade is likely to increase its attention to events on this side of the Atlantic, especially since the Greek debt talks have seemingly returned to square one.

With weaker equities to start, steady demand for the auction yesterday and unresolved Euro zone issues, the bull camp might think that the recent lows are capable of holding up prices. On the other hand, a clean sweep of better than expected US scheduled data and overtly upbeat dialogue from the US Fed, could revive the bearish attitude that seems to have dominated the US Treasury markets since the January 18th highs.

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While March 30-Year Bond prices climbed to a new 4-week high recently, we feel they are richly priced and vulnerable to a temporary setback. The recent trend of US economic data has shown continued improvement, suggesting that the US recovery could be gaining some momentum. While the US Treasury market will continue to ebb and flow with developments surrounding the European debt debacle, it is possible that the worst of that situation has already been priced into the market. So far in 2012, European debt auctions have gone generally better than expected, and that has helped to thaw short term lending markets in the region. Also, interest rates yields in Italy and Spain have eased from their recent extremes. Those governments have come to the market with new issuance, but so far the market doesn’t appear to be extracting a high cost for their borrowings. One of the market’s primary fears became a reality back on Friday January 13th when Standard and Poor’s downgraded credit ratings on eight European countries, but even that didn’t seem to prompt a typical anxiety event. While that negative headlines generated some safety bids and in turn served to push March Notes above their December highs, March bonds were not able to take out their December highs. Europe’s ability to successfully tap the capital markets could extract some of the fear premium out of the US Treasury market in the coming weeks.

The recent trend of US economic data has provided some hope that the US recovery will begin to stand on its own. The US labor market saw continuing jobless claims fall precipitously from their June 2009 peak of 6.398 million to the lowest level in 13 quarters at 3.657 million as of December 10th. More recently, US June Consumer Confidence climbed to its best level in eight months to 64.5 in December, and manufacturing activity has shown signs of leaving its 2011 summer trough. Additionally, the US housing market has also shown signs of improvement, evidenced by a surge in building permits and construction spending and US housing starts reaching 685,000 in November, their highest level since April 2010. Meanwhile, inflation is beginning to increase, with the December Producer Price Index (excluding food and energy) coming in at an annualized rate of 3.0%, the highest level since June 2009. Coincidentally, there has been a growing chorus of Fed officials that are leaning toward a pro-inflationary stance, as indicated by the continued commitment to extremely low interest rates even in the face of modest inflationary pressures.

While the latest string of US Treasury auctions showed very active participation at extremely low interest rates, there is growing competition from other nations (particularly the Euro zone) as well as from the private sector seeking capital. This could present a challenge in the weeks ahead. If the situation in Europe shows any sign of progress, that could help drive up rates on US Treasuries as they try to attract demand.

March Bonds have traded within a trading of 146-12 to 134-22 over the past four months. The market’s inability to rally to new highs in the wake of the latest European debt downgrade and in the face of recent promises of more easy monetary policy from the US Fed suggests that prices are a bit rich at 145-00.

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This content originated from - The Hightower Report.

Below is a sample of The Hightower Report’s Daily Commentary. To get this comment, and our daily coverage of 15 additional markets and trade ideas, visit futures-research.com for your free 2 week trial!

Apparently the markets have mostly discounted the end of week credit ratings downgrade from Europe, as global equity markets are showing overnight gains. In fact, with Euro zone inflation readings overnight also prompting talk of easing from the ECB, the trade has found a number of issues to distract attention from last week’s downgrades. Even results from a Spanish debt auction overnight appear to have provided some fresh optimism for the equation this morning, as falling yields in the Euro zone go a long way in reversing the anxiety that was put in place late last week by the S&P. Sentiment might be drawing an additional lift from favorable Chinese data overnight, as portions of the trade have come to the conclusion that a downtick in Chinese inflation and signs of weakness in the Chinese GDP figures, have opened up the potential for Chinese easing. However, the slowing in China was limited and that in turn could tamp down fears that China might be flirting with a hard landing. With German ZEW economic expectations overnight showing a massive improvement to a reading of -21.6 from -53.8 in the prior reading, it isn’t surprising to see a quasi risk on tilt in place to start the US holiday shortened week. In the US action today, the market will have a somewhat thin scheduled report slate, with the Empire State Manufacturing report the only report due out. Expectations call for a modest increase in the Empire State figures and that might serve to embolden the bears in Treasuries further, especially if equities see additional lift in the wake of the data. There will be some key financial sector earnings released this morning and in the wake of somewhat disappointing JP Morgan results last week it is possible that bank earnings could damped the initial bullish tilt in equities and physical commodity markets. In looking forward, the markets will see a relatively light US scheduled data slate this week, with Industrial Production and PPI reports due out later this week but those reports aren’t expected to markedly alter existing sentiment.

The Commitments of Traders Futures and Options report as of January 10th for U.S. Treasury Bonds showed Non-Commercial traders were net short 34,694 contracts, an increase of 5,966 contracts. The Commercial traders were net long 15,942 contracts, an increase of 3,503 contracts. The Non-reportable traders were net long 18,752 contracts, an increase of 2,463 contracts. Non-Commercial and Non-reportable combined traders held a net short position of 15,942 contracts. This represents an increase of 3,503 contracts in the net short position held by these traders.

US Treasury 10 Year Notes showed Non-Commercial traders were net long 25,067 contracts, an increase of 15,921 contracts. The Commercial traders were net long 11,164 contracts, an increase of 4,497 contracts. The Non-reportable traders were net short 36,232 contracts, an increase of 20,419 contracts. Non-Commercial and Non-reportable combined traders held a net short position of 11,165 contracts. This represents an increase of 4,498 contracts in the net short position held by these traders.

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While the Euro zone situation doesn’t seem to be markedly improved as a result of the latest EU Ministers decision to expand the EFSF, the market continues to be hopeful that something constructive will eventually be patched together (within the coming ten days) which in turn will meet the current liquidity requirements of troubled EU members. In other words, the EU seems to be inclined to take a case by case approach and so far they don’t seem to be poised to implement a Euro bond or an overly aggressively leveraged EFSF fund. With the German November jobless rate overnight falling to the lowest level in 20 years, the Germans aren’t seeing the urgency of the situation and they also seem deaf to the threat of a Euro zone contagion and that might be why their leadership is generally against writing a blank check to put down the speculation against weak EU members. Somewhat surprisingly, a widespread bank downgrade move by S&P overnight didn’t rekindle macro economic anxiety, which in turn left US Treasuries flat footed to start the Wednesday US trade action. In looking forward, the US trade will see an extremely active US scheduled report flow today with a sampling of private jobs/employment estimates, a Pending home sales report, an ISM manufacturing report, a PMI reading and in the early afternoon action, the market will also be presented with a Fed Beige book release. With the Euro zone situation this morning relatively calm, that could allow for a more significant reaction to the private jobs surveys, especially if the employment situation improves, as is generally expected by the trade. While the ADP payroll figure rarely tracks the monthly US official reading, seeing estimates for the report today, calling for a jobs gain that is 40,000 to 50,000 above the prior month’s US non farm payroll gain, it is possible that Treasuries could see a bit of macro-economic pressure early today. With the trade also expecting a minor improvement in the ISM and in the Pending home sales figures, that could give the bear camp some added resolve. However, news that the Euro zone jobless figure touched the highest level since records began and news that the ECB was seeing heavy use of its deposit facility, should mean that concern for the Euro zone will remain a supportive force, even if the economic news from the US gets most of the markets attention this morning. In the event that both private US job sector reports point to US growth today and with the trade still hopeful of something constructive from the EU summit, before the deadline 10 days out, the bear camp might feel like they have a slight measure of control in the trade today.

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Apparently the markets remain convinced that some type of deal will be reached in the Euro zone, as the weekend meetings gave off the impression of progress and safe haven markets to start today are somewhat off balance. However, the size of the EFSF fund doesn’t appear to be overly impressive and it seems as if initial targets for the fund are falling by the way side. Economic news from across the Atlantic overnight showed a slightly better than expected result from a German October services PMI reading, but that was countervailed by a Euro zone October Composite PMI reading that was below expectations and below the growth/no growth line. In fact, the press was fanning the threat of a European recession after the scheduled data release overnight, even though Euro zone Industrial Orders managed a surprising gain for the month of August.

Some traders might suggest that an August Industrial orders reading is an old number and that the Euro zone remains in a very precarious condition. At least to start the new week a number of physical commodity markets are trading higher, equities are attempting to claw out minor gains and the overall view toward the Euro situation is mostly under control. Therefore it is not surprising to US Treasuries starting out unchanged to minimally weaker. The week ahead will be heavily dependant on the Euro summit meeting on Wednesday, but the trade will also see a number of Fed speeches, Treasury supply, Durable goods, Consumer Confidence and New home sales figures and the question of recession or growth will remain a hot button issue.

In the action today, the trade will be presented with several Fed speeches and a Chicago Fed National Activity Index, which might show a minimal improvement from the prior month, but the Activity Index is generally expected to remain in negative ground. At least in the early going today, the markets don’t appear to be paying that much attention to predictions from a US investment banker that the US credit rating was likely to be cut again. Apparently the talk is that the US credit rating cut would come before the end of the year. With little or no progress from the Special Committee on the second tranche of US spending cuts, the US has probably been fortunate that the attention of the markets have been on other events but we aren’t sure how long that attention can be diverted, especially as the month of October comes to an end and the November deficit extension deadline comes into view again. In the mean time, Treasuries look to be influenced by a minor sell the rumor vibe off the Wednesday EU summit promise and the tone of the US scheduled data probably won’t interject that much influence on prices until the summit is out of the way.

The Commitments of Traders Futures and Options report as of October 18th for U.S. Treasury Bonds showed Non-Commercial traders were net short 13,832 contracts, a decrease of 10,686 contracts. The Commercial traders were net long 5,478 contracts, a decrease of 12,972 contracts. The Non-reportable traders were net long 8,354 contracts, an increase of 2,286 contracts. Non-Commercial and Non-reportable combined traders held a net short position of 5,478 contracts. This represents a decrease of 12,972 contracts in the net short position held by these traders. The Commitments of Traders Futures and Options report as of October 18th for US Treasury 10 Year Notes showed Non-Commercial traders were net short 162,075 contracts, a decrease of 21,495 contracts. The Commercial traders were net long 187,524 contracts, a decrease of 35,486 contracts. The Non-reportable traders were net short 25,449 contracts, a decrease of 13,991 contracts. Non-Commercial and Non-reportable combined traders held a net short position of 187,524 contracts. This represents a decrease of 35,486 contracts in the net short position held by these traders.

This content originated from - The Hightower Report.

Below is an excerpt from The Hightower Report’s most recent Newsletter. To receive access to this story, with trade strategies, and our daily coverage of 16 markets, visit futures-research.com for your free 2 week trial!

The most positive thing that can be said about the global economy is that some sectors have managed to hold up against the deterioration that was seen for most of the last 4 months. Clearly the Euro zone debt crisis has been and continues to be the primary cloud hanging over consumer and investor sentiment. One only needs to look back to the negative reactions in consumer confidence to the Fukushima incident and the August US debt debate to understand that the current debt event has the potential to be a very important junction. While the US debt situation remains unsolved, the markets can be expected to trade primarily off the ebb and flow of the Euro zone crisis. In other words, internal fundamental factors are likely to take a back seat to headlines and big picture macroeconomic influences.

Since the outcome of the October 23rd EU meeting (after this writing) looks to be the dominating influence for a large portion of this week’s trade, one might expect a rather significant expansion of volatility. At stake is the latest loan of 8 billion Euros, which is only a small portion of the 350 billion Euros that Greece owes the World Bank, the EU and a long list of European banks. While the trade as of this writing was assuming something in the range of 2 trillion Euros for the EFSF, a more troublesome concern is that ratings agencies have already begun another round of sovereign debt downgrades, with Spain, France and Italy under increased scrutiny.

While recent history suggests that another “plan” won’t fully end the Euro zone debt crisis, it is possible that a euphoria window might be presented and that many markets might see an extension of the relief rallies that have already been engineered from the September and October lows. Those that are skeptical of a final and sustainable Euro zone fix (with good reason) might consider buying near to expiration, near to the money call options and buying longer dated, further out of the money put options, particularly in those physical commodity markets that are heavily tied to the recession/no recession theme.

For flight-to-quality markets or markets that could come under pressure temporarily in the wake of a favorable EFSF funding announcement from the October 22-23 time frame, one should consider buying near to the money, near to expiration puts and buying further out of the money, longer time duration calls.

From a big picture perspective, the recent slide in many commodity prices should eventually be seen as a big value play, but even if the Euro zone situation is put to rest, the markets still need to see the US come to terms with its unfulfilled promise to reduce its budget by just over 2 trillion dollars. In looking at a chart of the speculator net long position in non-financial commodities, one can see that nearly two-thirds of the peak position has already been eliminated. Another sharp slide in prices could mean that commodities will have once factor in a return to recession or worse.

In retrospect, the 4th quarter of 2011 is likely to be known as the “2 trillion” period, as the Euro zone needs 2 trillion Euros just to kick the can down the road and the US needs to reduce spending by at least two trillion to live to fight another day. In classic economic terms, the US economy continues to hold together, with a decent payroll report for September on the books, auto sales staying firm and real estate managing to avoid further deterioration. More importantly, weekly initial jobless claims figures remain close to a downside breakout (see chart), and it is possible that a period of optimism from the Euro zone could pave the way for a slight recovery in the economy and a measure of calm ahead. While it is not too late to avoid a US recession, consumer and investor sentiment will be threatened over the coming five weeks if political leaders are unable to remove the uncertainty that breeds anxiety.

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Below is a sample of The Hightower Report’s Daily Commentary. To get this comment, and our daily coverage of 15 additional markets and trade ideas, visit futures-research.com for your free 2 week trial!

U.S. Treasury markets are on a lower track during the initial morning hours, partially from a better than expected September Non-Farm Payroll data Friday as well as from optimism surrounding last night’s meeting between Sarkozy and Merkel. The French and German leaders announced more “fresh steps” to resolve the region’s debt crisis that are expected to be released by the end of October. The goal remains the same, to address the Greek debt situation and establish a viable approach to recapitalize European banks but continues to lack details. However, December German Bunds slumped throughout the early morning hours as did US Treasuries. Despite the positive talk last night, overnight lending from the European Central Bank remained at elevated levels, and that is expected to continue ahead of re-funding operations this week. Meanwhile, it is possible that the December Treasury markets face a low-volume trade today as US Government offices and cash bond markets are closed for Columbus Day holiday. Friday’s better-than-expected Non-farm payrolls data seemed to go a long way in tamping down double dip recession fears, and that prompted a number of large Wall Street firms of raise their Q3 growth targets. Some portions of the market seemed to doubt the calculation behind Friday’s number, and that provided a level of support throughout the balance of the session. December Bonds and Notes also drafted a level of support following credit downgrades for Italy and France. Still, some traders view last week’s improved Consumer Confidence and ISM Non-manufacturing activity readings as a positive sign and one indicating that the US economy could be on the mend. Economic data this morning that showed October Eurozone sentiment falling to its lowest level in 2 years, failed to inspire much of a safety bid in government debt markets. Perhaps the rally in global equity markets, rally in commodities and sell off in the US Dollar support a risk-on attitude to start this morning. Other negatives weighing on the Treasury market this morning could be the denial of funding rumors by BNP Paribas and Societe General earlier this morning. Additionally, Dexia agreed to the nationalization of its Belgian banking division, and that might be reducing some of the fear premium in the market. The US economic calendar is quiet this morning but presents $66 billion in supply this week ($32 billion 3-Year Notes, $21 billion in 10-Year Notes and $13 billion in 30-Year Bonds) and September FOMC meeting minutes Tuesday, which is expected to offer more clues on the debate around operation twist. The Commitments of Traders Futures and Options report as of October 4th for U.S. Treasury Bonds showed non-commercial traders were net short 23,052 contracts, a decrease of 1,731. Non-commercial and nonreportable traders combined held a net short position of 25,680 contracts, an increase of 9,735. The Commitments of Traders Futures and Options report as of October 4th for US Treasury 10Yr Notes showed non-commercial traders were net short 111,406 contracts, an increase of 13,056. Non-commercial and nonreportable traders combined held a net short position of 118,671 contracts, up 4,202 on the week.

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