The Fed's Quantitative Easing program is now over and the 2nd quarter has come to a close. Welcome to the 3rd quarter of 2011. 

Benchmark Treasuries sold off sharply yesterday as a vortex of position squaring sucked yields higher after technical support broke down at 3.10% (on a surprisingly strong regional manufacturing report). The 10-year note yield spiked as high as 3.20% before month-end bargain buying helped reign in rising rates. The 10-year note went out -11/32 at 99-22 yielding 3.16% and the Fannie Mae 4.0 MBS coupon finished -7/32 at 99-31. 

Trading is anticipated to be light ahead of the long holiday weekend, yet quite a bit of fresh data will be hitting the headlines this morning including a key read on national manufacturing activity, which last month came pretty close to reporting a contraction.

The benchmark 10-year note is -4/32 at 99-26 yielding 3.147% (this is the 200 day moving average) and the Fannie Mae 4.0 MBS coupon is +3/32 at 100-02. Equity futures are marginally higher following four days of strong gains. The S&P looks to open 1.50  points higher at 1,317, while Dow futures are 27 points up at 12,373. The S&P 500 has already climbed 52 points this week, a 4.11% gain.

"ISM data is the clear cut focus following a much stronger than forecast Chicago PMI print yesterday. After that, traders will be counting down the hours until they can take marks and head out for the long holiday weekend", says MND's Adam Quinones. "Looking closer at mortgages, with rates moving higher this week and current coupon MBS coming off year to date spread wides, the entire coupon stack looks ripe for bargain buying. We're not too excited about seeing that today though. Liquidity will be an issue into the afternoon hours as attention is already averted toward rest and relaxation following a somewhat hectic run into quarter-end."

Key Events Today:

9:55 - Consumer Sentiment fell 2.5 points in mid-June to 71.8. A weak jobs market coupled with further declines in the stock market were largely to blame, and both continue to weigh on consumers. The consensus looks for no change.
"Since that time, there has been no good news to which households can point that would have lifted confidence," said economists at Nomura. "We don't expect the late-June figure to move much." 

Economists at Citigroup, however, predict that falling gasoline prices should buoy sentiment; on the other hand, they mention rising jobless claims and volatile equities.

10:00 - Growth in the ISM Manufacturing Index has been slowing down since peaking in February at a robust 61.4. The May index declined 6.9 points to 53.5, with the new orders component tumbling almost 11 points to 51. Further slowdown is expected in June: the consensus is predicting a score of 52. None of the economists surveyed predict a contraction, but if they are wrong it would break a 22-month trend of growth.

Economists at Janney Capital Markets explain why the index is so closely-watched by financial markets: "Manufacturing industry performance represents the most classic of leading indicators for overall domestic activity. Although factory output accounts for an estimated 15% of total production, it tends to be more volatile and quicker to react to changes in demand than the larger services sector output. As a result, the slowdown in manufacturing, perhaps best exemplified by declines in the ISM, is troubling for second half economic growth."

"A key item to watch," added economists at IHS Global Insight, "will be export orders, as future growth in manufacturing requires a solid export market when domestic demand is anemic. Export readings have bounced between a solid 55 and a robust 62 in the past 18 months and were at the low end of that range in May; they must thrive, or manufacturing shrivels."

10:00 - Construction Spending rose 0.4% in April, yet compared to 12 months prior it was down 9.3%. Pulling the index down recently has been public construction; it fell 1.9% in April, marking the eighth month of decline, whereas private spending climbed 1.7%. The May index is anticipated to fall 0.3% overall, though forecasts range widely from -0.8% to +0.2%.

"We look for a decline in May construction spending, led by a continued fall in public projects and a downswing in residential expenditures," said economists at Citigroup. "The long decline in residential construction seems to have run its course. Based on housing starts and building permits data, new construction has been relatively flat since the recession ended. But the residential construction spending numbers have been extremely volatile, reflecting big swings in additions and alterations."