US DEBT REVIEW AND OUTLOOK
US Treasuries fell on Thursday after data suggesting an uptick in inflation and renewed support for the sustainability of the economic recovery placed additional pressure on the long end of the yield curve. In the age old tradition of kicking a man when down, US Treasuries also had to contend with the aftermarket announcement by the Federal Reserve that they would be increasing the US discount rate-the rate that financial institutions can borrow funds from the Federal Reserve. While the quarter point increase was relatively small, it did send some initial shock waves which pressured the short end of the yield curve in particular. This could be an example of sell the rumor- buy the fact though, as the notion that the proposed exit strategy is real and under implementation may boost some confidence in the perceived fiscal responsibility of sovereign institutions. The confidence may be slow in coming though as additional pressure from another $100 billion of Treasury debt coming to market next week is likely to forestall a rally of “In Fed We Trust.”
Treasuries may suffer from some additional volatility on Friday as March options on future are set to expire as well. (Perhaps the announcement today had an addition motive-as traders would likely put up some fight to defend support on levels in Treasuries instead of pummeling the markets in the wake of the news.)
Technically, March 30 year futures are likely to continue with a longer term downward bias. Look for setup on the downside at 115-14. Expect a near term upward move to fill in recent gap that should find resistance at 116-25. A break to 117-14 could setup a new lower trading range.
US EQUITY REVIEW AND OUTLOOK
S&P Futures struggled to close near the highs of the session, shrugging of disappointing data regarding inflation pressures and employment. The market took its lead from indications of ongoing recovery in the US economy, particularly in the manufacturing sector, as leading indicators on the second Fed reserve survey of the week suggest steady, potentially sustainable recovery.
Energy and material stocks were among the best performers support by the uptick in recovery sentiment. The technology sector was also a strong performer today, led by expectations of strong earnings from Dell computers and CBS entertainment. Neither of the companies disappointed. Both companies beat expectations.
Equities were thrown for a loop in the aftermarket after the Federal Reserve announced it was increasing the discount rate- removing some of the doubt that the US government is planning to implement an exit strategy from the emergency liquidity provisions implemented to secure credit and mortgage markets.
Technically, March S&P futures broke through a key level of resistance today at 1103.00. This does set up the potential for the market to test the 1108.00 and 1118.00 levels. If there is follow through of downside pressure due to the Fed’s action, look for support to set up at 1090.70, with a break of this level setting up a move to retest 1086.00 and 1082.50.
Prepared by Rich Roscelli & Paul Brittain.
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US DEBT REVIEW AND OUTLOOK