ECONOMIC DATA 01/13/2009 (ALL TIMES EST):
8:30 AM-US INTERNATIONAL TRADE (-$51.0 B)
2:00 PM US TREASURY BUDGET (-$83.0B).
TREASURIES RALLY ON RISIING EARNINGS CONCERNS, EXPECTATIONS OF DATA SUPPORTING DEFLATIONARY ENVIRONMENT.
US Treasuries rallied strongly, closing up over a full basis point as the flight to quality sentiment returned to the markets as the Santa Rally all but disappeared and worst case scenarios regarding 2008 4th quarter earnings were priced into bonds & equities inversely. The case for the weakest global economy in nearly 70 years is expected to find additional evidence this week as companies prepare to release 4th quarter earnings that are expected to be significantly lower than this period last year. Additional support for global sovereign debt was obtained from expectations of economic data scheduled to be released later on in the week. US retail sales; PPI (Producers Price Index) & CPI (Consumer Price Index) are expected to show the continuation of an economic environment exhibiting recessionary & deflationary characteristics. A rising US dollar and falling commodity prices contributed to the appeal of secure fixed income. These elements represent a nearly ideal scenario for the appreciation of longer term, higher yielding government debt.
While a number of analysts are pairing back their initial 2009 bearish forecasts for Treasuries in the near term, the markets could be influenced by a buy the rumor, sell the fact mentality as it pertains to pricing in the worst case scenario for the global economic outlook. This could result in some significant pullbacks to the lower end of the recent trading range. A surprise upside in earnings or an economic outlook could be the catalyst for this downward retracement. Traders should expect a week of volatility in debt & equity markets which has not been seen in several weeks.
Technically, US 30 years appear to be nearing a near term top at the 135.02 level. Markets could retrace from current levels back to 133.20 initially with further pullback to 132.26. This will likely set the trading range throughout the earnings period.