3SOF

Thursday, February 3, 2011...

Today's Market Focus

•   March 10-year T-notes this morning are trading down -3 ticks. T-note prices yesterday slipped to a 1-1/2 week low and finished with moderate losses on supply pressures and the outlook for employment growth: TYH11 -13, FVH11 -12.2, EDM11 -0.5.

                Bearish factors included (1) the larger-than-expected increase in the Jan ADP employment change (+187,000 versus expectations of +140,000), and (2) supply pressures after the Treasury announced that it will auction $72 billion in T-notes and bonds in next week's Feb quarterly refunding.

                Bullish factors included (1) increased safe-haven demand for Treasuries after Standard & Poor's cut Ireland's credit rating to A- from A, and (2) increased safe-haven demand on concern that the civil unrest in Egypt may spread throughout the Middle East and lead to global instability after riots broke out between anti-government protesters and people loyal to President Mubarak.



•   The dollar index this morning is higher with the dollar/yen +0.13 yen and the euro/dollar -0.48 cents. The dollar index yesterday sank to a 2-3/4 month low but erased its losses and finished higher after the euro plunged when S&P cut Ireland's credit rating: Dollar Index +0.036, USDJPY +0.201, EURUSD -0.00179.

                Bullish factors for the dollar included (1) increased safe-haven demand for the dollar and weakness in the euro after Standard & Poor's cut Ireland's credit rating to A- from A and said the country remains on "creditwatch with negative implications," and (2) the action by the German government to rule out allowing the European Financial Stability Facility to fund bond buybacks for distressed European nations, which revives concern the sovereign-debt crisis may worsen.

                Bearish factors included (1) strength in the British pound which rallied to a 2-3/4 month high against the dollar after BOE policy member Sentance said the BOE must raise interest rates now at a steady pace to avoid a large increase later, and (2) the increase in the Dec Euro-Zone PPI to a 2-year high of 5.3% y/y, which raises expectations for rate hikes by the ECB and is euro supportive.



•   March crude oil prices this morning are trading up +73 cents a barrel and March gasoline is +1,62 cents per gallon. Crude oil and gasoline prices yesterday traded on both sides of unchanged and settled mixed as soaring gasoline supplies undercut gasoline prices and riots in Egypt lifted crude: CLH11 +0.09, RBH11 -0.82.

                Bullish factors included (1) concern that protests in Egypt will spread throughout the Middle East and disrupt global oil supplies after riots broke out between anti-government protesters and people loyal to President Mubarak, and (2) optimism that expanding global economic growth will boost energy demand.

                Bearish factors included (1) the rebound in the dollar after the dollar index recovered from a 2-3/4 month low and closed higher, which may reduce investment demand in commodities, (2) weakness in gasoline after the larger-than-expected increase in weekly gasoline inventories which surged to their highest level in 17-3/4 years (+6.15 million bbl to 2 36.2 million bbl versus expectations of a +2.0 million bbl build), and (3) a severe winter storm that shut down much of the central US, which reduces jet fuel and gasoline consumption and demand.

Friday, February 4, 2011...

Today's Market Focus

•   March 10-year T-notes this morning are trading down -2.5 ticks. T-note prices yesterday tumbled to a 1-month low and settled lower after services industries in the US expanded at their fastest pace in 5 years and factory orders unexpectedly increased: TYH11 -14.5, FVH11 -9.2, EDM11 +0.5.

                Bearish factors included (1) the larger-than-expected decrease in weekly initial US unemployment claims (-42,000 to 415,000 versus expectations of -34,000 to 420,000), (2) the unexpected increase in the Jan ISM non-manufacturing index to its best level in 5-1/3 years (+2.3 to 59.4 versus expectations of unchanged at 57.1), and (3) the unexpected increase in Dec factory orders (+0.2% versus expectations of -0.5%).

                Bullish factors included (1) the stronger-than-expected Q4 nonfarm productivity (+2.6% versus expectations of +2.0%), and for all of 2010 productivity rose +3.6%, the most since 2002, (2) a lack of wage pressures with the unexpected decline in Q4 unit labor costs (-0.6% v ersus expectations of +0.3%), and for all of 2010 labor costs fell -1.5% after a -1.6% drop in 2009, the first back-to-back declines since 1962-63, and (3) the Fed's action to purchase $8.87 billion of Treasuries as part of its QE2 asset-purchase program.



•   The dollar index this morning is slightly higher with the dollar/yen +0.03 yen and the euro/dollar -0.05 cents. The dollar index yesterday settled higher after the euro slumped on dovish remarks from ECB President Trichet: Dollar Index +0.643, USDJPY +0.068, EURUSD -0.01766.

                Bullish factors for the dollar included (1) euro weakness after comments from ECB President Trichet who said that interest rates "remain appropriate" and inflation risks are "broadly balanced," which dims the prospects for ECB rate hikes, and (2) the stronger-than-expected Q4 nonfarm productivity and the unexpected decline in Q4 unit labor costs, which is dollar supportive.

                Bearish factors included (1) strength in the British pound which rallied to a 2-3/4 month high against the dollar after the Jan UK PMI services index increased to an 8-month high, which boosts expectations of interest rate hikes by the BOE this year, and (2) the unexpected upward revision to the Jan Euro-Zon e PMI composite index to a 9-month high, which is euro supportive.



•   March crude oil prices this morning are trading up +29 cents a barrel and March gasoline is +0.69 of a cent per gallon. Crude oil and gasoline prices yesterday fluctuated on either sides of unchanged and settled mixed as a strong dollar offset violent political protests in Egypt: CLH11 -0.32, RBH11 +0.17. Mar gasoline posted a contract high.

                Bearish factors included (1) dollar strength, which may curtail investment demand for commodities, and (2) the prediction from tanker tracker Oil Movements that OPEC crude oil shipments will rise +1.7% to 24.16 million barrels a day in the four weeks to Feb 19.

                Bullish factors included (1) concern that violent political protests in Egypt will escalate throughout the Middle East and disrupt fuel supplies, and (2) the larger-than-expected increase in the Jan ISM non-manufacturing index to its best level in 5-1/3 years, which indicates strong fuel demand and consumption.

Monday, February 7, 2011...

Today's Market Focus

•   March 10-year T-notes this morning are trading down -3.5 ticks. T-note prices last Friday sank to a 7-1/2 month low and closed lower after the Jan US unemployment rate unexpectedly fell to a 1-3/4 year low: TYH11 -27.5, FVH11 -17.5, EDM11 unchanged. The 10-year T-note yield climbed to a 9-month high of 3.659%.

                Bearish factors included (1) the unexpected decline in the Jan US unemployment rate to a 1-3/4 year low (-0.4 to 9.0% versus expectations of +0.1 to 9.5%), (2) the larger-than-expected increase in Jan manufacturing payrolls (+49,000 versus expectations of +10,000), and (3) the statement from the US Labor Department that said bad weather prevented 886,000 Americans from going to work to the week of the Labor Department's Jan monthly job survey, compared with an average of 282,000 over the past 5 Januarys, which suggests that winter storms caused much of the weakness in the Jan payrolls report.

                Bullish factors included (1) the early spike higher in T-note pri ces after Jan nonfarm payrolls were reported up only +36,000, versus expectations of +143,000, and (2) the Fed's action to purchase $7.272 billion of Treasuries as part of its QE2 asset-purchase program.



•   The dollar index this morning is stronger with the dollar/yen +0.15 yen and the euro/dollar -0.33 cents. The dollar index last Friday finished higher after the US Labor Department said the weak payrolls report was due to winter storms: Dollar Index +0.227, USDJPY +0.575, EURUSD -0.00470.

                Bullish factors for the dollar included (1) the statement from the US Labor Department that said bad weather prevented 886,000 Americans from going work to the week of the Labor Department's Jan monthly job survey, compared with an average of 282,000 over the past 5 Januarys, which suggests that winter storms caused much of the weakness in the Jan payrolls report, and (2) euro weakness after comments from ECB Council member Nowotny who said "The ECB anticipates 1.8% inflation" next year, which suggests the ECB still expects inflation to fall back below its 2.0% limit over its policy-relevant time horizon and reduces pressure on them to increase interest rates.

                Bearish factor s included (1) early weakness in the dollar after the weaker-than-expected Jan nonfarm payrolls, although the dollar recovered after the US Labor Department said weather caused most of the weakness, and (2) strong demand for euros as the 3-month Euribor rate climbed to a 19-month high of 1.088% as banks hoard euros on concern the ECB may withdraw its emergency cash supplies in April.



•   March crude oil prices this morning are trading up +28 cents a barrel and March gasoline is +2.97 cents per gallon. Crude oil and gasoline prices last Friday spiked higher early but then sold-off and finished lower on concern the US economy is not producing enough jobs to increase energy demand: CLH11 -1.51, RBH11 -6.77.

                Bearish factors included (1) dollar strength, which may curtail investment demand for commodities, and (2) the weaker-than-expected Jan US payrolls report, which questions the sustainability of the US economic recovery and fuel demand.

                Bullish factors included (1) a temporary spike higher in gasoline prices after the US unemployment rate in Jan unexpectedly fell to a 1-3/4 year low, and (2) concerns that the civil unrest in Egypt will spill over into the major oil-producing regions of the Middle East or force the closure of the Suez Canal.

Moving the goalposts...
QE2 failed to achieve both of its stated goals: to "foster maximum employment and price stability". Unemployment remains stubbornly high, while long-term treasury yields are increasing — reflecting rising inflation expectations.

But if you listened to the Fed Chairman recently, you may be tempted to question either your memory or your hearing:
"Since August, when we announced our policy of reinvesting maturing securities and signaled we were considering more purchases, equity prices have risen significantly, volatility in the equity market has fallen, corporate bond spreads have narrowed, and inflation compensation as measured in the market for inflation-indexed securities has risen from low to more normal levels. Yields on 5- to 10-year Treasury securities initially declined markedly as markets priced in prospective Fed purchases; these yields subsequently rose, however, as investors became more optimistic about economic growth and as traders scaled back their expectations of future securities purchases."
He now claims that falling bonds and rising stock prices, in anticipation of higher inflation, are evidence that the strategy is succeeding. A clear case of moving the goalposts to fit the result.



•   March 10-year T-notes this morning are trading down -3.5 ticks. T-note prices last Friday sank to a 7-1/2 month low and closed lower after the Jan US unemployment rate unexpectedly fell to a 1-3/4 year low: TYH11 -27.5, FVH11 -17.5, EDM11 unchanged. The 10-year T-note yield climbed to a 9-month high of 3.659%.

                Bearish factors included (1) the unexpected decline in the Jan US unemployment rate to a 1-3/4 year low (-0.4 to 9.0% versus expectations of +0.1 to 9.5%), (2) the larger-than-expected increase in Jan manufacturing payrolls (+49,000 versus expectations of +10,000), and (3) the statement from the US Labor Department that said bad weather prevented 886,000 Americans from going to work to the week of the Labor Department's Jan monthly job survey, compared with an average of 282,000 over the past 5 Januarys, which suggests that winter storms caused much of the weakness in the Jan payrolls report.

                Bullish factors included (1) the early spike higher in T-note pri ces after Jan nonfarm payrolls were reported up only +36,000, versus expectations of +143,000, and (2) the Fed's action to purchase $7.272 billion of Treasuries as part of its QE2 asset-purchase program.

Tuesday, February 8, 2011...

Today's Market Focus

•   March 10-year T-notes this morning are trading down -1 tick. T-note prices yesterday fell to a 7-1/2 month low on reduced safe-haven demand after tensions eased in Egypt and the S&P 500 rallied but recovered their losses and finished little changed: TYH11 +1.0, FVH11 +1.0, EDM11 +0.5. The 10-year T-note yield climbed to a 9-month high of 3.693%.

                Bearish factors included (1) reduced safe-haven demand for Treasuries as geo-political concerns eased in Egypt after Egyptian Vice President Suleiman promised to draft a list of constitutional changes needed for free elections within a month and the S&P 500 Index rallied to a 2-1/2 year high, (2) the larger-than-expected increase in Dec US consumer credit (+$6.1 billion versus expectations of +$2.0 billion), which increases the chances that consumer spending will continue to expand, and (3) supply pressures ahead of the Treasury's $32 billion auction of 3-year T-notes on Tue.

                Bullish factors included (1) data from Merrill Lynch that shows 40% of the government bonds the Fed bought In Jan for its QE2 program were auctioned in the previous 90 days, or so-called on-the-run bonds, up from 20% purchased in Dec and 15% in Nov, which gives bond dealers more incentive to increase their bids at Treasury auctions and helps keep yields down, and (2) the Fed's action to purchase $8.359 billion of Treasuries as part of its QE2 asset-purchase program.



•   The dollar index this morning is weaker with the dollar/yen -0.14 yen and the euro/dollar +0.63 cents. The dollar index yesterday rallied to a 2-week high as the euro declined on weak German factory orders but gave up most of its gains and finished little changed on reduced safe-haven demand after the stock market rallied to a 2-1/2 year high: Dollar Index +0.012, USDJPY +0.130, EURUSD -0.00041.

                Bullish factors for the dollar included (1) the slump in the euro to a 2-week low against the dollar after Dec German factory orders contracted more than expected, and (2) expectations for strong US economic data this week on US consumer credit and weekly initial jobless claims, which will bolster optimism that the US economic recovery can be sustained.

                Bearish factors included (1) euro supportive comments from ECB Council member Gonzalez-Paramo who said that interest rates would have to rise if inflation doesn't start to decline by the end of the year, and (2) the larger-than -expected increase in the Feb Euro-Zone Sentix investor confidence which rose to a 3-1/4 year high and is euro bullish.



•   March crude oil prices this morning are trading down -$1.14 a barrel and March gasoline is -1.25 cents per gallon as China's interst rate hike undercuts commodities. Crude oil and gasoline prices yesterday traded sideways to lower and settled mixed as the dollar strengthened and tensions eased in Egypt: CLH11 -1.55, RBH11 +1.52. Mar crude slipped to a 1-week low.

                Bearish factors included (1) the rally in the dollar index to a 2-week high, which may curb investment demand for commodities, and (2) reduced tensions in Egypt after Egyptian Vice President Suleiman promised within a month to draft a list of constitutional changes needed for free elections.

                Bullish factors included (1) strength in gasoline on concerns that several refinery closures by ConocoPhillips in Texas, Exxon-Mobile in Louisiana and Valero Energy in Aruba may limit US gasoline supplies, and (2) the rally in the S&P 500 Index to a 2-1/2 year high, which bolsters confidence in the economic outlook a nd energy demand.

Wednesday, February 9, 2011...

Today's Market Focus

•   March 10-year T-notes this morning are trading up +0.5 of a tick. T-note prices yesterday traded with small losses into early afternoon and then tumbled into the close after the Treasury's 3-year T-note auction was met with weak demand: TYH11 -20, FVH11 -17.2, EDM11 -1.5. The 10-year T-note yield climbed to a 9-1/4 month high of 3.733%.

                Bearish factors included (1) hawkish comments from Richmond Fed President Lacker who said the quickening US recovery means policy makers need to take "quite seriously" their commitment to review the $600 billion asset-purchase program, which suggests he favors ending the QE2 program sooner rather than later, (2) weak demand for the Treasury's $32 billion auction of 3-year T-notes that had a bid-to-cover ratio of 3.01, below the 12-auction average of 3.12, and (3) supply pressures ahead of the Treasury's $24 billion auction of 10-year T-notes on Wed.

                Bullish factors included (1) comments from Atlanta Fed President Lockhar t who said economic concern that the US recovery may falter is "justified" as hiring lags behind economic growth, and (2) the Fed's action to purchase $2.19 billion of Treasuries as part of its QE2 asset-purchase program.



•   The dollar index this morning is little changed with the dollar/yen +0.19 yen and the euro/dollar +0.25 cents. The dollar index yesterday weakened after China raised interest rates and on reduced safe-haven demand for the dollar as the stock market rallied: Dollar Index -0.030, USDJPY +0.043, EURUSD +0.00428.

                Bearish factors for the dollar included (1) the action by China to raise interest rates for the third time since mid-Oct, (2) reduced safe-haven demand for the dollar after the stock market rallied and as tensions eased in Egypt, and (3) hawkish comments from ECB Council member Mersch that lifted the euro when he said policy makers would need to come up with "a rigorous intervention" if higher inflation persists.

                Bullish factors included (1) dollar supportive comments from Richmond Fed President Lacker who said the quickening US recovery means policy makers need to take "quite seriously" their commitment to review the $600 billion asset-purcha se program scheduled to end in June, which suggests he favors ending the QE2 program sooner rather than later, and (2) the unexpected decline in Dec German industrial production, which is euro negative.



•   March crude oil prices this morning are trading up +40 cents a barrel and March gasoline is +1.32 cents per gallon. Crude oil and gasoline prices yesterday fluctuated on either side of unchanged as the action by China to raise interest rates was offset by refinery shutdowns that may limit gasoline supplies: CLH11 -0.54, RBH11 +0.95. Mar crude and Mar gasoline fell to 1-week lows.

                Bearish factors included (1) the action by China to raise interest rates for the third time since mid-Oct, which may slow China's economy and its fuel demand, (2) an easing of the political tension in Egypt, which reduces chances of civil unrest spreading throughout the Middle East that may disrupt global oil supplies, (3) carry-over weakness from a fall in natural gas prices to a 1-1/2 month low after the DOE raised its forecast for 2011 US natural gas production to 62.43 billion cubic feet a day from last month's forecast of 61.38 billion cubic feet a day, and (4) the outlook for US crude s upplies to increase for a fourth week when the DOE releases its weekly inventory figures on Wed.

                Bullish factors included (1) the weaker dollar, which boosts investment demand for commodities, and (2) strength in gasoline on concerns that several refinery closures by ConocoPhillips in Texas, Exxon-Mobile in Louisiana and Valero Energy in Aruba may limit US gasoline supplies. Expectations for Wednesday's weekly DOE inventory report are for crude oil stockpiles to increase by +2.0 million bbl, gasoline supplies to rise +2.7 million bbl, distillate inventories to fall -1.0 million bbl and the refinery utilization rate to fall -0.2 to 84.7%

Thursday, February 10, 2011...

Today's Market Focus

•   March 10-year T-notes this morning are trading down -1.5 ticks. T-note prices yesterday recovered from a 7-1/2 month low and closed higher after Fed Chairman Bernanke said US job growth will remain sluggish along with strong foreign demand for the Treasury's 10-year T-note auction: TYH11 +19, FVH11 +11.2, EDM11 +1.5. The 10-year T-note yield rose to a 9-1/2 month high of 3.766% but fell back and closed 12 bp lower at 3.640%.

                Bullish factors included (1) comments from Fed Chairman Bernanke who said US unemployment will "remain elevated for some time," which suggests the Fed will keep its quantitative easing program in place through June and may even expand it, (2) strong foreign demand for the Treasury's $24 billion 10-year T-note auction in which indirect bidders, a class of investors that includes foreign central banks, bought 71.3% of the T-notes, well ahead of the 12-auction average of 44.3% and the highest since 2003, and (3) the Fed's action to purc hase $7.51 billion of Treasuries as part of its QE2 asset-purchase program.

                Bearish factors included (1) comments from Treasury Secretary Geithner who said the US economic "recovery is accelerating" and that the US is growing twice as fast as Europe or Japan, and (2) supply pressures ahead of the Treasury's $16 billion auction of 30-year T-bonds on Thursday.



•   The dollar index this morning is higher with the dollar/yen +0.46 yen and the euro/dollar -1.08 cents. The dollar index yesterday weakened and closed lower after Fed Chairman Bernanke told the House Budget Committee that high US unemployment will persist: Dollar Index -0.358, USDJPY -0.014, EURUSD +0.01072.

                Bearish factors for the dollar included (1) comments from Fed Chairman Bernanke who said the US unemployment rate is likely to remain high "for some time," which is dollar bearish as it may prompt the Fed to keep its quantitative easing measures intact and possibly expand them, and (2) the increase in the 10-year German bund yield to a 1-year high of 3.315%, which benefits the euro's interest rate differentials.

                Bullish factors included (1) the report from Reuters that well-known monetary policy hawk Axel Weber will drop out of the race to succeed Jean-Claude Trichet as head of the ECB, which is euro negative as rate-hike expectations were reduced, and (2 ) comments from Treasury Secretary Geithner who said the US economic "recovery is accelerating" and that the US is growing twice as fast as Europe or Japan.



•   March crude oil prices this morning are trading down -44 cents a barrel and March gasoline is -0.57 of a cent per gallon. Crude oil and gasoline prices yesterday gyrated on both sides of unchanged and settled mixed as a weaker dollar offset the rise in US gasoline supplies to a nearly 21-year high: CLH11 -0.23, RBH11 +3.18.

                Bullish factors included (1) the weaker dollar, which boosts investment demand for commodities, and (2) the action by pirates to hijack a US bound supertanker of Kuwaiti oil off the coast of Oman, which may increase the costs of shipping oil as insurance rates rise and shippers take longer routes to avoid pirate filled waters.

                Bearish factors included (1) comments from Fed Chairman Bernanke who said the US unemployment rate is likely to remain high "for some time," which may keep US economic growth and energy demand stagnant, (2) the larger-than-expected increase in US gasoline inventories (+4.66 million bbl to 240.9 million bbl, the high est since March 1990 and more than expectations of +2.7 million bbl), (3) slack gasoline demand, as measured by deliveries to wholesalers, which fell -0.3% to 8.52 million barrels a day, the lowest level in a year, and (4) the unexpected increase in distillate supplies (+288,000 bbl versus expectations of a -1.0 million bbl decline).

Friday, February 11, 2011...

Today's Market Focus

•   March 10-year T-notes this morning are trading up +11 ticks. T-note prices yesterday traded weaker after weekly initial unemployment claims fell more than expected along with slack demand for the Treasury's 30-year T-bond auction: TYH11 -14.5, FVH11 -12.5, EDM11 -1.0.

                Bearish factors included (1) the larger-than-expected decline in weekly initial US unemployment claims which fell to their lowest level in 2-1/2 years (-36,000 to 383,000 versus expectations of -5,000 to 410,000), (2) below average demand for the Treasury's $16 billion auction of 30-year T-bonds that has a bid-to-cover ratio of 2,51, below the 12-auction average of 2.67, and (3) reduced safe-haven demand for Treasuries on speculation that President Mubarak of Egypt would soon step down.

                Bullish factors included (1) renewed European sovereign-debt concerns that boosted the safe-haven demand for Treasuries after the yield on the 10-year Portuguese bond climbed to its highest since the introduction of t he euro in 1999, and (2) bond dealer short covering as the Treasury concluded with its Feb quarterly refunding of $72 billion of T-notes and T-bonds.



•   The dollar index this morning is trading higher and at a 3-week high with the dollar/yen +0.36 yen and the euro/dollar -0.84 cents. The dollar index yesterday rallied on strong US economic data and renewed European sovereign-debt concerns: Dollar Index +0.609, USDJPY +0.868, EURUSD -0.01313.

                Bullish factors for the dollar included (1) the fall in weekly initial US unemployment claims to a 2-1/2 year low, which suggests improvement in the US economy, and (2) weakness in the euro on renewed sovereign-debt concerns after the yield on the 10-year Portuguese bond climbed to 7.64%, the highest since the introduction of the euro in 1999.

                Bearish factors included (1) euro supportive comments from ECB Council member Wellink who said that upside risks to price stability "clearly dominate" in the short term and that Europe's recovery was becoming more self-sustaining, and (2) reduced safe-haven demand for the dollar on speculation that Egyptian President Mubarak woul d shortly bow to protesters' demands and step down as President of Egypt.



•   March crude oil prices this morning are trading up +22 cents a barrel and March gasoline is +0.92 cents per gallon. Crude oil and gasoline prices yesterday fluctuated on either side of unchanged and settled mixed as a stronger dollar and the IEA's action to raise its global crude demand forecast gyrated prices: CLH11 +0.02, RBH11 -5.62. Mar gasoline rallied to a 2-1/3 nearest-futures high but erased its gains and settled lower.

                Bullish factors included (1) the action by the IEA to raise its 2011 global oil demand forecast for a fifth month by +140,000 barrels a day from its Jan forecast to 89.3 million bpd and say that oil supplies in the OECD countries fell by 55.6 million bbl to a 2-year low of 2.67 billion bbl in Dec, and (2) the larger-than-expected decline in weekly US initial unemployment claims to their lowest level in 2-1/2 years, which signals improvement in the labor market that may lead to increased fuel demand.

                Bearish factors included (1) dollar strength , which reduces investment demand for commodities, and (2) updated weather forecasts that call for above-normal temperatures for the US Northeast from Feb 15-23, which may reduce demand for heating fuels.

Monday, February 14, 2011...

Today's Market Focus

•   March 10-year T-notes this morning are trading unchanged. T-note prices last Friday gained on Middle East uncertainty and a post-refunding rally: TYH11 +12, FVH11 +5.2, EDM11 unchanged.

                Bullish factors included (1) increased safe-haven demand for Treasuries as the resignation of Egyptian President Mubarack increases uncertainty on who will lead Egypt, (2) the action by the Fed to purchase $7.375 billion of Treasuries as part of its QE2 asset-purchase program, and (3) a post-refunding rally as the Treasury concluded with its Feb quarterly refunding of $72 billion of T-notes and T-bonds.

                Bearish factors included (1) the larger-than-expected increase in the Feb US University of Michigan consumer confidence, which rose to its best level in 8 months (+0.9 to 75.1 versus expectations of +0.8 to 75.0), and (2) reduced safe-haven demand for Treasuries after the S&P 500 posted a fresh 2-1/2 year high.



•   The dollar index this morning is trading higher and at a 3-week high with the dollar/yen -0.01 yen and the euro/dollar -1.00 cent. The dollar index last Friday rallied to a 3-week high on uncertainty in Egypt along with the increase in Feb US consumer confidence: Dollar Index +0.210, USDJPY +0.223, EURUSD -0.00540.

                Bullish factors for the dollar included (1) increased safe-haven demand for the dollar after Egyptian President Mubarak stepped down, which increases uncertainty on who is going to take control in Egypt, (2) weakness in the euro which fell to a 3-week low against the dollar after ECB Council Member and Bundesbank President Weber said he will step down effective Apr 30, which may reduce ECB rate-hike expectations as Weber is a staunch inflation fighter and his absence from the ECB is euro negative, (3) the jump in the Feb US University of Michigan consumer confidence to an 8-month high, which is positive for the US economy and supportive for the dollar.

                Bearish factors included (1) the rally in the S&P 500 Index to a 2-1/2 year high, which reduces the safe-haven demand for the dollar, and (2) hawkish comments from ECB Council member and Bank of France President Noyer who said that "we are not willing to make compromises on second-round effects" of higher inflation to feed through into higher wage demands.



•   March crude oil prices this morning are trading down 3 cents a barrel and March gasoline up +2.28 cents per gallon. Crude oil and gasoline prices last Friday settle lower due to a stronger dollar and after Egyptian President Mubarak stepped down: CLH11 -$1.15, RBH11 -0.46. Mar crude fell to a 2-1/2 month low.

                Bearish factors included (1) the rally in the dollar index to a 3-week high, which reduces investment demand for commodities, (2) the action by Egyptian President Mubarak to step down and hand power to the Egyptian military, which reduces concern that crude shipments from the Middle East will be disrupted, and (3) carry-over weakness from the plunge in natural gas prices to a 2-3/4 month low on speculation that demand for heating fuels will weaken after the Commodity Weather Group predicted warmer-than-normal temperatures in the eastern two-thirds of the US from Feb 16-20.

                Bullish factors included (1) the prediction from Deutsche Bank that China may increase its crude oil imports this year by 530,000 barrels a day or 11% to 5.4 million barrels as additional emergency storage tanks come into operation as it continues its stockpiling of commodities, and (2) the increase in Feb US University of Michigan consumer confidence to an 8-month high, which may portend to increased consumer spending and demand for fuel.

Tuesday, February 15, 2011...

Today's Market Focus

•   March 10-year T-notes this morning are trading down -9.5 ticks. T-note prices yesterday shook off early weakness and closed higher on dovish comments from the New York Fed President along with Fed purchases of Treasuries: TYH11 +4, FVH11 +2, EDM11 unchanged.

                Bullish factors included (1) comments from New York Fed President Dudley who said that he backs continued Fed asset purchases to "help ease financial conditions" and stimulate economic growth, (2) a paper from the San Francisco Fed that said there appears to be "little need" to raise the Fed funds rate target anytime soon, given unemployment and inflation aren't meeting the central bank's objectives, and (3) the action by the Fed to purchase $1.497 billion of Treasuries as part of its QE2 asset-purchase program.

                Bearish factors included (1) revised deficit figures from the White House that predict the US deficit for the current fiscal year will climb to a record $1.6 trillion, up from a pre vious estimate $1.4 trillion, which may lead to increased Treasury issuance, (2) the rally in the S&P 500 to a fresh 2-1/2 year high, and (2) reduced safe-haven demand for Treasuries on optimism that the global economic expansion may continue after Jan China exports and imports rose more-than-expected and Japan's Q4 GDP contracted less than expected.



•   The dollar index this morning is trading weaker with the dollar/yen +0.35 yen and the euro/dollar +0.47 cents. The dollar index yesterday pushed up to a 3-week high after the euro weakened when Euro-Zone finance ministers ruled out immediate steps to tackle the debt crisis: Dollar Index +0.154, USDJPY -0.122, EURUSD -0.00586.

                Bullish factors for the dollar included (1) the slump in the euro to a 3-week low against the dollar on renewed concerns over the European sovereign-debt crisis after Reuters reported that a rescue plan for WestLB AG, the German state-owned bank bailed out during the financial crisis, may founder, (2) disagreement among European leaders on debt reduction targets after Ireland's main opposition party said a new Irish government would seek to renegotiate detail's of the country's recent financial bailout and Greece said that demands from the European Union and the IMF that Greece sell state assets to raise as much as 50 billion euros by 2015 to pay down debt were "unacceptable."

                Bearish factors included (1) strength in the yen against the dollar after Japan's Q4 GDP contracted less than expected, and (2) dollar negative comments from New York Fed President Dudley who said that he backs continued Fed asset purchases to "help ease financial conditions" and stimulate economic growth.



•   March crude oil prices this morning are trading up +41 cents a barrel and March gasoline is up +0.31 of a cent per gallon. Crude oil and gasoline prices yesterday fluctuated and settled mixed as the dollar strengthened and undercut crude but a fire at a St. Croix refinery lifted gasoline as it threatens to limit US gasoline supplies: CLH11 -$0.77, RBH11 +5.22. Mar crude fell to a 2-1/2 month low and Mar gasoline climbed to a 2-1/3 nearest futures high.

                Bearish factors included (1) the rally in the dollar index to a 3-week high, which reduces investment demand for commodities, (2) reduced concern that civil unrest in the Middle East will disrupt crude supplies after Egypt's ruling army council said it aims to transfer power within 6 months to a democratically elected government, and (3) comments from the UAE oil minister who said the oil market is "well supplied" and that OPEC is ready to provide more crude to consumers as demand grows.

                Bullish factors included (1) strength in gasoline prices as a fire in the 525,000 barrel a day Hovensa LLC refinery in St. Croix threatens to limit US gasoline supplies, (2) the +27% y/y increase in Jan China crude oil imports to a 4-month high of 21.5 MMT, which signals strong demand, (3) the larger-than-expected increase in Jan China exports and imports, which suggests growing demand in the world's largest energy-consuming country, and (4) the warning from JPMorgan Chase that the departure of Egyptian President Mubarak "inspires" protesters in the Middle East and that "the prospect of regional contagion impacting a key oil supplier appears elevated.

Wednesday, February 16, 2011...

Today's Market Focus

•   March 10-year T-notes this morning are trading up +4 ticks. T-note prices yesterday moved higher after mid-morning as weak US retail sales and housing data offset strong import prices and growth in New York manufacturing: TYH11 +0.5, FVH11 +2.2, EDM11 unchanged.

                Bullish factors included (1) the weaker-than-expected Jan US retail sales (+0.3% and +0.3% less autos versus expectations of +0.5% and +0.5% less autos), (2) the stagnant US housing market after the Feb NAHB housing market index remained unchanged for the fourth consecutive month, (3) the Fed's purchase of $6.689 billion of Treasuries as part of its QE2 asset-purchase program, and (4) the prediction from BNP Paribas Asset Management that the US yield curve will flatten as yields on longer-dated Treasuries rise less than on shorter-maturity notes as the Fed continues to buy longer-term Treasuries to keep rates down.

                Bearish factors included (1) the larger-than-expected increase in Jan import prices (+1.5% m /m and +5.3% y/y versus expectations of +0.8% m/m and 4.4% y/y), as the +5.3% y/y gain is the highest in 9 months, (2) the stronger-than-expected Feb Empire manufacturing index which expanded at its best level in 8 months (+3.5 to 15.4 versus expectations of +3.1 to 15.0).



•   The dollar index this morning is trading lower with the dollar/yen +0.03 yen and the euro/dollar +0.17 cents. The dollar index yesterday closed slightly lower as weaker-than-expected US retail sales and an increase in German investor confidence undercut support for the dollar: Dollar Index -0.041, USDJPY +0.446, EURUSD -0.00014.

                Bearish factors for the dollar included (1) the increase in the Feb German ZEW investor confidence to a 7-month high, which is euro supportive, and (2) the weaker-than-expected Jan US retail sales, which is dollar negative.

                Bullish factors included (1) the weaker-than-expected Q3 Euro-Zone GDP, which is euro negative, and (2) the larger than expected increase in the Dec net long-term TIC flows, which shows continued strong foreign demand for US dollar assets.



•   March crude oil prices this morning are trading up +24 cents a barrel and March gasoline is +1.57 cents per gallon. Crude oil and gasoline prices yesterday fluctuated on both sides of unchanged and finally settled lower as concerns over increasing crude supplies offset fears of escalating civil unrest in the Middle East: CLH11 -$0.49, RBH11 -2.86. Mar crude sank to a 2-1/2 month low.

                Bearish factors included (1) the weaker-than-expected Q4 Euro-Zone GDP, which signals slower than expected energy consumption in Europe, (2) weaker than expected US Jan retail sales, signaling reduced fuel demand, and (3) the outlook for US crude supplies to increase for a fifth straight week when the DOE reports weekly crude inventories on Wed.

                Bullish factors included (1) the weaker dollar, which boosts investment demand for commodities, (2) concerns that crude supplies may be disrupted after civil unrest spread to Bahrain, Yemen and Iran, the second-largest OPEC producer, and (3) the larger-than-expected increase in the Feb Empire manufacturing index to an 8-month high, which indicates economic expansion and increased fuel consumption. Expectations for Wednesday's weekly DOE inventory report are for crude supplies to increase +2.0 million bbl, gasoline stockpiles to climb +1.65 million bbl, distillate inventories to fall -400,000 bbl and the refinery utilization rate to slip -0.1 to 84.6%.

Thursday, February 17, 2011...

Today's Market Focus

•   March 10-year T-notes this morning are trading up +3.5 ticks . T-note prices yesterday fluctuated on either side of unchanged as stronger-than-expected housing starts offset increased safe-haven demand from an escalation in Middle East tensions: TYH11 +0.5, FVH11 +2.2, EDM11 unchanged.

               Bearish factors included (1) the larger-than-expected increase in Jan core PPI (+0.5% m/m and +1.6% y/y versus expectations of +0.2% m/m and +1.2% y/y) as the +1.6% y/y gain matches a 16-month high, (2) the larger-than-expected increase on Jan US housing starts that climbed to a 4-month high (+14.6% to 596,000 versus expectations of +2.1% to 540,000), and (3) the minutes of the Jan 25-26 FOMC meeting in which the Fed raised its US growth projections for this year to 3.4% to 3.9%, compared with a Nov forecast of 3.0% to 3.6%, saying household spending picked up and recent economic data showed a "stronger tenor."

               Bullish factors included (1) the unexpected decline in Jan ind ustrial production (-0.1% versus expectations of +0.5%), (2) the decline in MBA mortgage applications to a 2-year low, which may keep the US housing market depressed, (3) increased safe-haven demand for Treasuries after Israel's foreign minister called Iran's plans to sail 2 gunboats through the Suez Canal a "provocation," and (4) the Fed's purchase of $1.89 billion of Treasuries as part of its QE2 asset-purchase program.



•   The dollar index this morning is trading little changed with the dollar/yen -0.07 yen and the euro/dollar -0.12 cents. The dollar index yesterday weakened on reduced safe-haven demand for the dollar as global stock markets rallied on optimism the global economic recovery can continue: Dollar Index -0.350, USDJPY -0.096, EURUSD +0.00816.

               Bearish factors for the dollar included (1) reduced safe-haven demand for the dollar after the S&P 500 climbed to a 2-1/2 year high, (2) comments from an unnamed German government official that the G-20 will discuss ways of diversifying global currency reserves when they meet this weekend in Paris, which may lead to reduced demand for dollars or a reduction in the dollar's status as the world's reserve currency.

               Bullish factors included (1) stronger-than-expected US economic data on Jan housing starts and Jan producer prices, and (2) data from the IMF that shows Greek and Irish banks have issued at least 70 billion euros ($95 billi on) of bonds to create the collateral required to get cash from the ECB, which is a form of quantitative easing and euro negative as the banks are basically issuing unsecured loans to themselves.



•   March crude oil prices this morning are trading down -28 cents a barrel and March gasoline is -0.72 of a cent per gallon. Crude oil and gasoline prices yesterday moved higher on rising Middle East tensions and on lower than expected increases in weekly crude supplies: CLH11 +$0.67, RBH11 +5.59.

                Bullish factors included (1) the weaker dollar, which boosts investment demand for commodities, (2) the lower-than-expected increases in weekly crude and gasoline supplies (crude +860,000 bbl versus expectations of +2.0 million bbl and gasoline +205,000 bbl versus expectations of +1.65 million bbl, (3) the larger-than-expected draw in weekly distillate supplies (-3.10 million bbl versus expectations of -400,000 bbl) and (4) rising tensions in the Middle East after civil unrest spread to Libya, the holder of Africa's largest oil reserves and after Israeli Foreign Minister Lieberman said 2 Iranian gunboats are planning to move through the Suez Canal to Syria, which spurred concern that oil shipments may be disrupted.

                Bearish factors included (1) the prediction from energy researcher JBC Energy GmbH that the narrowing spread between premium fuels such as naphtha and cheaper heavy fuel oil may signal a slowdown in the world economy, and (2) despite the smaller-than-expected increase in weekly gasoline supplies, US gasoline supplies now stand at 241.1 million bbl, a nearly 21-year high and a sign of slack demand.

Friday, February 18, 2011...

Today's Market Focus

•   March 10-year T-notes this morning are trading down -3 ticks. T-note prices yesterday rallied to a 2-week high and finished higher on an escalation in Middle East tensions along with an increase in weekly jobless claims: TYH11 +13.5, FVH11 +11.7, EDM11 +2.0.

                Bullish factors included (1) the larger-than-expected increase in weekly US initial unemployment claims (+25,000 to 410,000 versus expectations of +17,000 to 400,000), (2) increased safe-haven demand for Treasuries after Iran said it is sending 2 warships through the Suez Canal, which risks an Iranian confrontation with Israel, (3) dovish comments from Chicago Fed President Evans who said monetary stimulus is needed to spur the "disappointing" pace of the economic recovery, and (4) the Fed's purchase of $7.24 billion of Treasuries as part of its QE2 asset-purchase program.

                Bearish factors included (1) the larger-than-expected increase in Jan core CPI (+0.2% m/m and +1.0% y/y versus expectations of +0 .1% m/m and +0.9% y/y), (2) the larger-than-expected increase in the Feb Philadelphia Fed manufacturing index which expanded at its fastest level in 7 years (+16.6 to 35.9 versus expectations of +1.7 to 21.0), and (3) reduced safe-haven demand for Treasuries after the S&P 500 climbed to a 2-1/2 year high.



•   The dollar index this morning is trading higher with the dollar/yen +0.10 yen and the euro/dollar -0.54 cents. The dollar index yesterday closed lower for a third day as Treasury yields weakened and US jobless claims rose more than expected: Dollar Index -0.233, USDJPY -0.369, EURUSD +0.00400.

                Bearish factors for the dollar included (1) the drop in Treasury yields to a 2-week low, which weakens the dollar's interest rate differentials and reduces demand for dollar assets, (2) the larger-than-expected increase in weekly US jobless claims, which indicates a struggling labor market that may prompt the Fed into additional stimulus at the expense of the dollar, (3) strength in the British pound which rallied to a 2-week high against the dollar after BOE policy maker Sentance said the BOE should raise interest rates to boost the pound as a means of curbing inflation, and (4) reduced safe-haven demand for the dollar after the S&P 500 climbed to a 2-1/2 year high.

                Bullish factors included (1) comments from Portuguese government minister Pereira who said that delay in an "effective" European response to the "turbulence" in sovereign debt markets hurts the euro, and (2) a possible increase in the safe-haven demand for the dollar after Iran said it is sending 2 warships through the Suez Canal, which risks an Iranian confrontation with Israel.



•   March crude oil prices this morning are trading down -10 cents a barrel and March gasoline is +0.66 of a cent per gallon. Crude oil and gasoline prices yesterday fluctuated on both sides of unchanged and settle mixed as rising Middle East tensions offset a larger-than-expected increase in US jobless claims: CLH11 +$1.37, RBH11 -1.70. Mar gasoline climbed to a 2-1/3 year high but erased its gains and closed lower.

                Bullish factors included (1) the weaker dollar, which boosts investment demand for commodities, (2) escalating tensions in the Middle East as demonstrators clashed with police in Bahrain and Libya, the holder of Africa's largest oil reserves, and after Iran said it plans to send 2 warships through the Suez Canal, which raised concern about a possible confrontation with Israel, and (3) the increase in the Feb Philadelphia Fed manufacturing index to its best level in 7 years, which indicates strength in the economy and increased fuel consumption and demand.

                Bearish factors included (1) the larger-than-expected increase in weekly US jobless claims, which indicates a weak labor market that may hinder fuel demand, and (2) the forecast from the National Weather Service's Climate Prediction Center for normal temperatures for the US Northeast from Feb 22 through Mar 2, which may lead to reduced demand for heating fuels.

Tuesday, February 22, 2011...

Today's Market Focus

•   March 10-year T-notes this morning are trading up +12.5 ticks on increased safe-haven demand as global equity markets tumble. T-note prices last Friday settled slightly higher as an increase in safe-haven demand offset hawkish comments from an ECB official: TYH11 +1.5, FVH11 +1.7, EDM11 unchanged.

                Bullish factors included (1) increased safe-haven demand for Treasuries on continued civil unrest in the Middle East, and (2) the Fed's purchase of $6.688 billion of Treasuries as part of its QE 2 asset-purchase program.

                Bearish factors included (1) comments from ECB Executive Board member Smaghi who said that due to rising price pressures, the "degree of accommodation of monetary policy has to be monitored and, if needed, corrected," which undercut European and US bond markets on concern the ECB may soon raise interest rates, and (2) reduced safe-haven demand for Treasuries after the S&P 500 climbed to a 2-1/2 year high.



•   The dollar index this morning is trading higher with the dollar/yen -0.04 yen and the euro/dollar +0.01 cent. The dollar index last Friday slid to a 1-week low and settled lower after an ECB Council member said interest rates may need to be raised to combat inflation: Dollar Index -0.331, USDJPY -0.201, EURUSD +0.00764.

                Bearish factors for the dollar included (1) the rally in the euro to a 1-week high against the dollar after ECB Executive Board member Smaghi said the ECB may need to raise interest rates as global inflation pressures mount, and (2) strength in the British pound which climbed to a 2-week high against the dollar after Jan UK retail sales rose by almost four times expectations.

                Bullish factors included (1) the unexpected decline in Feb France business confidence, which is euro negative, and (2) comments from former Japanese vice finance minister Gyohten who said the dollar won't lose its status as the world's reserve currency as it will take China 10 to 15 years to complete the financial reforms needed for the yuan to be included in the IMF's foreign-exchange basket.



•   March crude oil prices this morning are trading sharly higher by $6.85 a barrel and March gasoline +8.77 cents per gallon. Crude and gasoline prices surged to 2-1/3 year highs in overnight trade as violence escalates in Libya, owner of Africa's biigest oil reserves. Crude oil and gasoline prices last Friday settled mixed after China's action to raise banks' reserve requirements was offset by continued unrest in the Middle East: CLH11 -$0.16, RBH11 +2.36.

                Bullish factors included (1) the drop in the dollar index to a 1-week low, which boosts investment demand for commodities, (2) heightened tensions in the Middle East as escalating protests in Bahrain and Libya fueled concern that supplies from oil-producing countries in the Middle East will be disrupted, and (3) the rally in the S&P 500 to a 2-1/2 year high, which boosts confidence in the economic outlook and energy demand.

                Bearish factors included (1) the action by China to raise banks' reserve ratios for the se cond time this year, which may slow is economy and fuel demand, and (2) the action by Deutsche Bank AG to cut its price forecast for WTI crude this year to $91 a barrel from a previous forecast of $96 and to cut ni goldits 2012 WTI crude price forecast to $95 a barrel from an earlier forecast of $98 a barrel.

Wednesday, February 23, 2011...

Today's Market Focus

•   March 10-year T-notes this morning are trading down -8.5 ticks. T-note prices yesterday posted a 2-1/2 week high and closed sharply higher on increased safe-haven demand along with Fed purchases of Treasuries: TYH11 +1-1/32, FVH11 +22.5, EDM11 +0.5.

                Bullish factors included (1) increased safe-haven demand for Treasuries as an escalation of civil unrest and violence intensified in Libya and prompted a sell-off in world equity markets, (2) the larger-than-expected decline in the Dec S&P/CaseShiller composite-20 home price index which posted its biggest year-over-year decline in 1 year (-2.4% y/y versus expectations of -2.3% y/y), which indicates continued weakness in the US housing market, and (3) the Fed's purchase of $7.240 billion of Treasuries as part of its QE 2 asset-purchase program.

                Bearish factors included (1) the unexpected increase in Feb US consumer confidence which rose to a 3-year high (+5.6 to 70.4 versus expectations of -2.1 to 63.5), (2) the une xpected increase in the Feb Richmond Fed manufacturing index (+7 to 25 versus expectations of -1 to 17), and (3) supply pressures ahead of the Treasury's $35 billion auction of 5-year T-notes on Wed.



•   The dollar index this morning is trading lower with the dollar/yen +0.20 yen and the euro/dollar +0.87 cents. The dollar index yesterday closed higher but well off its best levels after strong safe-haven demand for the dollar was offset by hawkish comments from an ECB official: Dollar Index +0.079, USDJPY -0.337, EURUSD -0.00348.

                Bullish factors included (1) increased safe-haven demand for the dollar as violent protests escalated in Libya, (2) the action by Moody's Investors Service to lower the outlook on Japan's Aa2 debt rating to negative from stable, which is yen negative, (3) the unexpected increase in Feb US consumer confidence to a 3-year high, which is dollar supportive, and (4) the prediction from the head of Germany's Ifo research institute that Greece is likely to be forced to restructure its debt because EU governments won't flood Greece with financial aid, that exiting the euro would wreck Greece's banking system, and a 20% to 30% cut in domestic wages in Greece to restore competitiveness would trigger civil disorder.

                Bearish factors for the dollar included (1) hawkish comments from ECB Council member Mersch who said ECB officials may toughen their language on inflation when they meet next week, which suggests the ECB may be ready to raise interest rates in the near future, and (2) the larger-than-expected decline in Dec S&P/CaseShiller composite-20 home price index which showed US home prices fell -2.4% y/y, their biggest year-over-year decline in a year, and signals continued weakness in the US housing market.


•   April crude oil prices this morning are trading up +50 cents a barrel and April gasoline is +3.21 cents per gallon. Crude oil and gasoline prices yesterday surged to 2-1/3 year highs and closed sharply higher on concern that violent unrest in Libya may disrupt crude supplies: CLJ11 +$5.71, RBJ11 +5.63.

                Bullish factors included (1) an escalation of violent civil unrest in Libya, owner of Africa's biggest oil reserves, which fueled concern that crude supplies from Libya may be disrupted, (2) Iran's action to sail 2 warships through the Suez Canal, which Israel considers "a provocation," and (3) concern that the ongoing civil unrest in North Africa and the Middle East will spread to the oil-producing areas of the region and disrupt global crude supplies.

                Bearish factors included (1) strength in the dollar, which may limit investment demand for commodities, and (2) comments from Saudi Arabian Oil Minister Ali al-Naimi who said OPEC is ready to step in to meet an y shortage in oil supply resulting from a disruption in crude shipments from Libya and that global oil markets have sufficient supply and prices at $70 to $80 a barrel would be "fair" for producers and consumers alike.