Interest rates are up and equity futures are slightly improved this morning after Standard & Poor’s cut Japan’s sovereign credit rating one notch to AA-.

S&P believes the current government running the world’s second largest economy “lacks a coherent strategy to address these negative aspects of the country’s debt dynamics, in part due to the coalition having lost its majority in the upper house of parliament last summer”. 

MND analysts have recently warned of the potential for antagonistic rhetoric on the U.S. budget deficit to negatively impact the sentiment of bond traders. READ MORE: Budget Battle Looms. Bond Vigilantes LurK

“The JPY fell on the news, pushing briefly above ¥83 while the Nikkei rose 0.7% ― closing before the news of the ratings cut broke,” said economists at BMO Capital Markets.

The benchmark 10 year Treasury note is 10/32 lower in price at 93-03+ yielding 3.458%. The FNCL 4.5 MBS coupon-4/32 at 101-25. S&P 500 futures are trading 1.50 points higher at 1,295.00 but Dow futures are 24 points higher at 11,960.

Commodity prices are also mixed. Light crude oil is down 0.37% at $87.00 per barrel and while gold prices are 1.01% lower at $1,332.15.

Meantime, the US$ index is slightly weaker. 

Key Events Today:

8:30 — Durable Goods are anticipated to jump 1.5% in December, following a sharp rebound among core goods a month earlier. The November headline fell 1.3%, but the decline was due almost solely to commercial aircraft orders. For December, the core index ― non-defense goods excluding aircrafts ― is expected to rise 1.6%. 

“Headline orders will be pulled down by another drop in aircraft orders, with sluggish gross new orders at Boeing combining with some cancellations to leave net new orders for complete aircraft near zero,” said economists at IHS Global Insight. 

They added that core goods should see another uptick, and defense orders could provide a little lift, but the latter will be faint next to the bounce seen in November when it recovered from an 18-month low. 

8:30 — The average for Initial Jobless Claims over the past three weeks had been 419k, a higher level than December’s 414k average but lower than November’s 432k. The most recent report showed claims at just 404k, setting up some forecasters to predict as few as 375k claims in the report. The consensus view is more temperate at 405k.

“The substantial seasonal adjustments required by atypical holiday employment diminish the reliability of this indicator,” said economists at Nomura. “We expect claims to come in near the 4-week moving average ― a more reliable statistic, in the neighborhood of 411k.”

10:00 — Look for a 1% increase in the Pending Home Sales Index. While the index jumped 3.5% in November, poor weather in December is leading economists to view any increase as marginal at best. 

Moreover, economists at Deutsche Bank add a warning that a ‘double-dip’ is still a possibility for the housing market.

But, they added, “the outlook on housing will depend on the trajectory of the labor market [and] if our forecast for an 8.8% unemployment rate by the end of next year proves correct, we are likely to see the worst of the housing market collapse behind us.”

10:15 — The Fed will purchase an estimated $4-6 billion in Treasuries maturing between 7/31/2012 and 7/15/2013

1:00 — Treasury will auction $29 billion 7-year notes maturing on January 31, 2018.