The bond market was closed Monday so Treasury yields are only now backing up in reaction to the broad equity rally which pushed the Dow nearly 3% higher to reclaim its 50-day moving average. The S&P 500 also jumped 3.41%.

The news sending equities higher: German Chancellor Angela Merkel and French President Nicholas Sarkozy announced they were developing a "comprehensive strategy" to resolve the eurozone debt crisis by the start of November.

The benchmark 10-year Treasury yield is sixbasis points higher than Friday's close at 2.135%, the two-year yield is a single basis point up at 0.304%, and the 30-year yield is four basis points higher at 3.06%.

Enthusiasm has dampened from Monday as the market awaits a parliamentary vote on the eurozone’s rescue fund from Slovakia. S&P 500 futures are 5.9 points lower at 1,185 and Dow futures are 38 points lower at 11,330. 

In Asia, Japan's Nikkei 225 finished 1.95% higher and shares in Hong Kong jumped 2.43% But Europe's ongoing session is seeing losses. The FTSE 100 is off 0.61% and Germany's DAX is trading 0.30% lower.

Light crude oil is 0.42% lower at $85.03 per barrel, and gold prices are 0.38% lower at $1,664.70 per ounce.

While no major data is expected for release today, the Q3 earnings season kicks off with aluminum producer Alcoa. The report, to be followed by Pepsi on Wednesday and Google and JPMorgan on Thursday, could set the tone for earnings expectations. Expectations are weak in light of the weakening global economy. 

Key Events This Week: 

Tuesday:

No major data.

 

  • Treasury Auctions:
  • 11:30 - 3-Moth Bills
  • 11:30 - 6-Month Bills
  • 1:00 - 3-Year Notes

 

Wednesday:

1:20 - Richard Fisher, president of the Dallas Fed, speaks on Fed operations and the economy to a Dallas Fed community forum.

1:30 - Charles Plosser, president of the Philadelphia Fed, speaks on the economic outlook at Wharton in Philadelphia.

2:00 - The FOMC Minutes should provide Fed-watchers more detail on the underpinnings of Operation Twist - the effort to flatten the yield curve by swapping $400 billion of short-term notes for longer-duration securities. The Sept. 21 decision to 

purchase bonds as lengthy at 30 years surprised the market and pancaked the spread between 10-year 30-year yields, all without adding to the Fed's balance sheet.

"The most notable move was the Fed's announcement that it would 'support conditions in mortgage markets" by reinvesting 'principle payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities,' says Nomura Global Economics. "In the minutes of the September meeting, we hope to get more details on the 'significant downside' risk to the outlook, but more importantly, what tools were discussed as indicated by the Committee's statement that, 'The Committee discussed the range of policy tools available to promote a stronger economic recovery.'

2:15 - Sandra Pianalto, president of the Cleveland Fed, speaks on leadership in challenging times at the University of Akron, Ohio

 

  • Treasury Auctions:
  • 11:30 -  4-Week Bills
  • 1:00 - 10-Year Notes

 

Thursday: 

8:30 - The Trade Balance is expected to be in deficit of $46 billion in August, versus a $44.8 billion gap in July and a $51.6 billion hole in June. The July figure was much narrower than anticipated (and the lowest since April) thanks to a 3.6% pickup in exports. The median estimate this month assumes exports will slowing down, but any rise in imports should be limited as WTI oil prices fell $10 per barrel to $86.

"Exports should retreat modestly after a very strong rebound in July," said IHS Global Insight, anticipating a $44 billion deficit. "On the import front, we expect little movement from petroleum imports, while non-petroleum imports should decline after a strong uptick in July. Trade should provide a boost of around 1.0 percentage point to growth in the third quarter (after adding 0.2 percentage-points to the second quarter), as export growth improves and imports fall slightly."

Economists at Citigroup also believe net exports added almost a point to GDP in the third quarter. 

"Export demand seems to have picked up somewhat in the quarter. But the real shift was in imports, which stalled out completely in real terms. As such, it is hard to view the mathematical contribution from trade as a positive for the economy. The pullback in import growth was matched by a similar drop in domestic demand for imported products and services."

8:30 - Initial Jobless Claims rose less than anticipated to 401k in the week ending Oct. 1, with the four-week average declining 4k to 414k. The first full week of October is anticipated to see 405k new filings, which Citi says would allow the four-week average to retreat to a seven-week low.

"However, there is a risk of a larger weekly increase as unadjusted filings typically spike at the beginning of each quarter," Citi added. "Claims were particularly elevated in September reflecting a number of special factors, but also general softening in the economy. Further improvement in filings would support our expectation of faster second half growth."

2:00 - September is usually a time of surplus for the U.S. Treasury Budget, but not this year. Following an August deficit of $134.2 billion, the September deficit is anticipated at $64.5 billion, or roughly double the September 2010 level.

According to Bloomberg, the average surplus for September over the past decade has been $29.8 billion; for the last five years: $27 billion. 

Nomura Global Economics estimates that Treasury receipts fell 4% year-over-year in September, while government outlays grew 14.5%. 

"As such, the U.S. budget deficit likely widened to $85 billion compared to $34.6 billion in September 2010," Nomura said. "The U.S. budget deficit is tracking -$1,319 billion in fiscal 2011 compared to -$1,294 in fiscal 2010."

2:30 - Narayana Kockerlakota, president of the Minneapolis Fed, speech to Sidney (Montana) Area Business Leaders.

 

  • Treasury Auctions:
  • 1:00 - 30-Year Bonds

 

Friday:

8:30 - Retail Sales, the key data point this week, could provide some support for markets if economists are correct in assuming a 0.6% uptick in September. The August report came in flat; spending growth was held back by declines at auto dealerships, as well as in clothing, department stores, and restaurants.

September should reverse the trend as auto dealers posted 13 million light vehicle sales, versus August's 12.1 million units, according to IHS Global Insight.

"Retail sales excluding autos are expected to rise 0.4%, due to growth in sales at building materials and garden supply stores and gasoline stations," IHS Global said. "Retail sales used to estimate personal spending - total retail sales less autos, less building materials, less gasoline - are expected to increase only 0.2%, not a dramatic rise, but still better than August, which was flat. Consumer confidence is still in recession territory, but spending is holding up better than sentiment."

Vehicle sales are the largest single category of retail sales, reminded Janney Capital Markets. The firm said the increase in car sales will be the brightest spot in September retail sales, while the other items are mixed.

"Early returns from retailers point towards a 1% increase in same store sales, which is a healthy performance for what's typically an off month between back-to-school and the holiday seasons," Janney said. "The same store sales performance is all the more impressive considering weather trends in the beginning of the month, which featured the after-math of Hurricane Irene hitting the population-heavy areas in the northeast as well as a downright obscene heat wave across the most populated areas of the south."

9:55 - Consumer Sentiment should remain at abysmal levels in October. The index last ticked up to 59.4 from 55.7, but remains roughly 25% lower than before the summer. The median estimate anticipates a score of 60 this month, a recessionary level.

"Consumer sentiment fell sharply during the summer months, and consumers face  considerable headwinds such as poor job prospects, declining household net worth, higher poverty rates, and rising prices," said IHS Global Insight, predicting a slightly higher than consensus estimate. "However, consumer confidence has been slowly improving since August."

"Sentiment surveys seem to be taking their cue from the loss in equity wealth," added Citigroup. They noted that sentiment has largely decoupled from spending behavior, thankfully.

"At the same time consumers report little optimism, they bought more motor vehicles and merchandise at large retail outlets."

10:00 - Business Inventories climbed by a flatter than expected 0.4% in July as sales grew 0.7% and the inventory to sales ratio fell a basis point to 1.27. The falling ratio suggests businesses aren't piling up inventories and will continue to purchase supplies so long as the economy remains growing. The August figure is also expected at 0.4%.

"Inventory building has slowed from a torrid pace earlier in the year," said Nomura Global Economics. "Downside risk to expectations could come in the form of lower energy prices."