A weak session in Asia following Moody's one-notch downgrade of Japan's credit rating to Aa3 has markets looking cautious ahead of Friday's speech from Fed chairman Ben Bernanke.

The two-year Treasury yield is a basis point up at 0.22%, but the 10-year yield is firmer by two basis points at 2.14% and the 30-year yield is two basis points lower at at 3.47%. Mortgages are mostly sideways. The Fannie Mae 3.5 MBS coupon is -2/32 at 100-25 while the Fannie 4.0 is +1/32 at 103-24.

"There's a cautious tone to markets, after Asian equities were unable to capture North America's momentum and ended lower," said economists at BMO Capital Markets.

Chinese shares closed 0.51% lower, while the main indexes in Japan and Hong Kong fell 1.07% and 2.06%, respectively.

The downgrade was "prompted by large budget deficits and the build-up in Japanese government debt since the 2009 global recession," the credit agency said. The Moody's rating is now parallel to S&P's. 

"The vast majority of Japanese sovereign debt is domestically funded, so the negative news likely won't have much effect," BMO added. 

The ongoing session in Europe has so far managed to eke out gains, with the FTSE 100 up 0.18% the CAC-40 up 0.66%.

Two hours ahead of the opening bell, S&P 500 futures are 8.25 points lower (-0.73%) at 1,150.00, and Dow futures are 92 points off (-0.83%) at 11,061.

Light crude oil fell 0.26% overnight to $85.23 per barrel. Gold prices dropped 0.70% to $1,848.20.

Just released: the Mortgage Bankers Association reported that mortgage application volume declined 2.4% in the week ending August 19, with both purchases and refinancings down.

Key Events Today:

8:30 - New Orders for Durable Goods are expected to surge in July, but the major jump is due almost solely to the transportation sector, specifically to civilian aircraft orders and a moderate rebound in motor vehicle sales. The median estimate is for a 2% increase, with some estimates as high 7.4%, following a 1.9% cut in the prior month. 

"One hundred 737's - that was the American Airlines order from Boeing on July 27," said economists at IHS Global Insight. "It was worth about $7.7 billion at book prices. If the planes appear in the government's orders data in this report, headline durable goods orders will be strong."

Optimism ends there. Excluding the transportation sector, forecasters assume a 0.4% drop.

"If the aircraft orders don't hit the government's books until August, then July will be a damp squib," IHS Global Insight says. "The aircraft leverage is massive, because the rest of the picture looks gloomy, with orders for non-defense capital goods ex-aircraft likely to fall 2.2% as June's seasonal surge in turbines orders disappears."  

Treasury Auctions:

• 1:00 - 5-Year Notes