Treasuries are flat and equities are modestly higher Friday morning despite a Standard & Poor's warning that it could strip the U.S. of its AAA rating within the next 90 days.

Both the 2-year and 10-year Treasury note are unchanged at 0.371% and 2.951% respectively, while the 30-year bond yield is up 1.4 basis points at 4.268%.  The Fannie Mae 4.0 MBS coupon is +3/32 at 100-26.

"There is at least a one-in-two likelihood that we could lower the long-term rating on the U.S. within the next 90 days," S&P said late Thursday. 

S&P 500 futures are 4.75points higher at 1,311.50 and Dow futures are up 44 points at 12,427. This partly erases 54 point loss in the Dow on Thursday; stocks fell after Fed chairman Ben Bernanke downplayed another round of stimulus.

From Rate Movers: Political Gamesmanship and Curve Spreads

Up until now the bond market has generally ignored debt ceiling headlines. There's been too much noise surrounding the entire situation and no one really thinks the U.S. will really default on its debt obligations. But that's not what happened today. The long end of the yield curve finally reacted negatively to bond bearish debt ceiling headlines....

This reaction may just be a one-off event based on trading technicals. The 10-yr note did bounce AGGRESSIVELY at a key technical resistance level (2.90%) after Boehner's headlines crossed newswires. That makes a tech-based reversal a valid explanation.

OR.

This could be the start of something new. Bonds are looking technically overbought and the economy has yet to confirm a continued slowdown is in progress. That means there is little new motivation for a sustained break of said 2.90% resistance. With 10s out of room to rally, perhaps the market's attention is finally shifting toward domestic politics and the debt-ceiling????

The potential for ongoing EU tapebombs and the strength of this week's auction cycle, especially the long-bond, paint a totally different story though. One that is more supportive of lower mortgage rates and a flatter curve (370bps = 38% retrace level).  But investor boredom combined with technical sell signals certainly make one wonder what direction we're headed next. Phew. The best thing for this market right now seems to be the weekend.  There's just too much bullsh*t floating in the water to make any broad sweeping assumptions about strategic directionality. Stay nimble...

From last Friday to yesterday, the 10-year Treasury yield lost 20 basis points, helped by a flight-to-quality induced by weak payrolls and worries over European debt.

Key Events Today:

8:30 - Just like its cousin producer index, the Consumer Price Index is anticipated to show a monthly decline owing to falling energy prices in June. The consensus looks for a 0.2% decline, with forecasts ranging from -0.3% to flat. Core prices are forecast to rise 0.2%, which would keep the annual climb at 1.5%.

"Motorists cheered when gasoline pump prices ticked down in June, and gasoline prices in the CPI should drop around 7%," said economists at IHS Global Insight.

"Although core CPI remains low," Citi added, "this inflation measure has been accelerating all year. However, with the enormous slack in the economy, high profit margins, and resistant consumers, we think this bump up was mostly early-year residual seasonality. Inflation expectations remained anchored during the run-up in energy prices. And now that these prices are coming off, there is little chance that they will become unglued."

8:30 - The Empire State Manufacturing Index should give us an early look at how the sector is shaping up in July. Let's hope it's better than in June, when the report unexpectedly tumbled almost 20 points into negative territory at -7.8. The consensus this time around is +8.

"Since manufacturing activity appeared to have started to recover from supply-chain disruptions in mid-June, positive momentum will likely carries over to July's survey," said economists at Nomura. "Therefore, we look for a 4.2 reading in July, a significant rebound from -7.79 previously."

9:15 - Industrial Production is anticipated to climb 0.4% in June, following a meagre 0.1% gain in May. The pickup in pace largely reflects a restoration in auto production and a rebound in utility output due to warmer weather, economists say. 

"A modest, and partial, rebound in motor vehicle production is the best thing going for the industrial sector in June," said economists at IHS Global Insight. "Industrial output has been almost flat on balance over the past two months, as motor vehicle and parts output dropped. June should see that negative go away and be replaced by a small positive, lifting both manufacturing and total production to 0.3% gains. Manufacturing outside motor vehicles looks soft based on a weak figure for hours worked in the employment report. Electricity output should be a small plus as June was a bit more unusually warm than May."

9:55 - Economists have resigned themselves to a weaker Consumer Sentiment report. The consensus estimate is a half-point down at 71, with forecasts ranging from 68 to 73. With so little job growth last month and a housing market scraping along the bottom, it's difficult to see why this index would improve at all.

"Consumer news has not been very favorable," said IHS Global Insight. "May and June payroll numbers were disappointing, household net worth is taking a beating from volatile stock markets and depressed home prices, and gasoline and food prices are still relatively high. The good news is that gasoline prices are off their peak, providing relief to strained household budgets. The fall in gasoline prices is pushing down inflationary expectations and should improve sentiment."

11:00 - President Obama will speak. His comments are expected to be focused on the debt ceiling debate. Watch out this could be a market mover...

12:00 - The European Banking Authority's Stress Tests are expected to show that as many as 15 lenders need more capital to withstand a prolonged recession, with criticism growing that the tests do not encompass the impact of a Greek default. READ MORE