Interest rates are giving back yesterday's flight to safety rally and equities are recovering this morning after a rout that pushed the major indexes down around 1.35% Tuesday.

S&P 500 futures are 3.75 points higher at 1,182.00 and Dow futures are up 29 points up at 11,043.

In the bond market the 5 year note is leading weakness across the curve with a 6.6bp rise in yield. The soon to be auctioned 7-year note is up 3.5bps in yield at 2.116% while 10s are 2.4bps higher at 2.806%. The 2s/10s curve is 1bp steeper at 234bps.

With weakness focused on the belly of the yield curve, rate sheet influential MBS coupons are also off yesterday's price highs. The FNCL 3.5 is -4/32 at 98-15. The FNCL 4.0 coupon is -4/32 at 101-21. The FNCL 4.5 is -2/32 at 101-15. Yield spreads are tighter on the spot vs. modest bear steepening in benchmarks and wider swap spreads.

The amount of new data coming out today is a bit staggering. No data is released tomorrow or Friday because of the holiday, so release dates have been pushed up.

The major news overnight was that S&P downgraded Ireland’s credit ratings. Its long-term rating was slashed two notches to A from AA-, while its short-term rating was cut one notch to A1 from A1+. Credit outlooks remain negative.

“Markets are clearly very concerned, with Irish and Portuguese CDS spreads at or near record highs,” said economists at BMO Capital Markets, noting that bond yields are up across the board ― Irish 10-year yields are up 27 basis points to 8.51%, Portugal 10-yrs are up 11 bps to 6.84%, and Spain 10-yrs rose 8 bps to 4.96%. 

Irish Finance Minister Brian Lenihan is expected to unveil a four-year deficit cutting plan which would  close the budget gap to to 3% of GDP by 2014, from 12% this year, according to BMO, who add there is some uncertainty as to whether the budget will be able to pass at all.

In fresh U.S. data, the just released MBA Mortgage Applications survey said loan application volume climbed 2.1% for the week ending Nov. 19 .Refinancings fell 1.0% to the lowest level since late June, while purchases increased 14.4% (but are still 7.4% lower than one year ago.)
“The increase in purchase applications last week aligns with other incoming data suggesting that consumers are feeling somewhat more confident with their financial situation,” said Michael Fratantoni from MBA. “While the increase was magnified somewhat by the comparison to the holiday week, the level of purchase applications on a seasonally adjusted basis is now at its highest level since the expiration of the homebuyer tax credit.”

Economists at Nomura noted before the release that purchase applications, despite recent gains, continue to languish at low levels. “This may indicate downside risks to our home sales forecasts for the next few months,” they added.

The average contract interest rate for 30-year fixed-rate mortgages increased to 4.50%  from 4.46%,

Key Events Today:

8:30 ― Durable Goods are expected to be flat in October following a 3.5% advance one month before. Forecasts are all over the place however, ranging from -2.7% to +4.5%. Not all news is bad though; the core index, defined as non-defense spending excluding aircraft, is anticipated to rise 1% after falling 0.2% in September. The discrepancy arises from September’s 105% monthly climb in non-defense aircraft parts.

Economists at Nomura, looking for a 0.5% increase overall, said October’s industrial production report signaled “very strong growth in business equipment output” and suggests a healthy underlying trend in capital expenditure ― “and therefore core durable goods orders.”

8:30 ― The October Personal Income & Outlays report is anticipated to show wages and consumption rising amid flat inflation. Economists predict income will rise 0.4%, following a 0.1% cut one month before, while consumption will pick up 0.5% after rising 0.2%. Core inflation, which excludes volatile energy and food prices, is set to be unchanged for the second month, providing the Federal Reserve with a defense of its reflationary QE2 measures.

Economists at BMTU note that year-to-year personal income began expanding in December 2009 following eleven months of decline. The growth rate was 3.1% in September.

“While that’s the best growth rate in income since late 2008, it is still about half of the historical average,” BTMU says. “Wages were up +1.7% year-over-year in September, which is the third consecutive month they’ve outpaced inflation since the recession began in December 2007.”

Forecasters at IHS Global Insight look for wages and salaries – which they call “the best guide to underlying trends” – to rise 0.5% in October.

“Higher employment, a longer working week, and increased hourly earnings all drove wages and salaries higher in October,” they said.

8:30 ― Many will be watching the Initial Jobless Claims report to see if the trend in claimants continues to fall. There were 439k and 437k new claims in the weeks ending Nov. 13 and Nov. 6, respectively, which drove the 4-week average to the lowest level since September 2008. A sustained number below 450k is generally indicative of private job growth in the US economy.

“Recent claims reports have increased our optimism about the state of the US labor market,” said economists at Nomura. “If we see another good report this week we will likely push up our forecasts for nonfarm payroll employment growth.”

10:00 ― The Reuters / U of Michigan Consumer Sentiment report bumped up 1.6 points in mid-November to 69.3. The current economic conditions index climbed 3.1 points to 79.7 and the expectations component moved up less than one point to 62.7. Revisions are expected to be minor, with analysts forecasting a 0.2 point gain to 69.5. 

“The index of consumer sentiment remains quite low despite higher stock prices and improving economic conditions,” said economists at Nomura. “Given that the index was as high as 76.0 in June, we think further increases from 69.3 are quite plausible. The inflation expectation components of this report signal little risk of deflation.”

10:00 ― New Home Sales, the final bit of new data for the holiday-shortened week, is expected to show the annual pace of sales rise to 310,000 in October, from 307,000 one month before. Last month’s positive employment report provides the hope for more sales in the final quarter of 2010. Extremely low mortgage rates are also a nice incentive.

Analysts at Nomura look for the index to jump 4.2% to 320,000. 

“The post-tax credit bust in new home sales looks to have ended, and building sentiment has started to pick up (albeit slowly and from a very low level),” they noted. “Given that new home sales remain quite low, we see room for further increases.”

Treasury Auctions:

• 1:00 ― $29 billion 7-Year Notes