Although the bond markets were closed on Veterans' day, equities and Treasury futures suggested that things could be a bit rough for MBS to start the week today.  Equities rallied and Treasury futures sold on news that Italy's senate approved an austerity package and hopes that Italian parliament would seal the deal on Friday.  Indeed they did and in the process replaced Prime Minister Berlusconi with the technocrat Mario Monti. 

All of the attention paid to Italy between Friday and this morning was expected to climax with this morning's Italian Government Bond issuance.  The auction was successful, but less so than it might have been without a hefty dose of ECB buying.  It also left spreads to German bunds a bit wider than markets had anticipated based on the decidedly "risk-on" trading seen on Friday. 

Bottom line, we're seeing a bit of buyer's remorse among those who bought the hype of Euro-Zone contagion being rapidly on the mend due to leadership changes (Greece's new PM confirmed late last week as well).  After rising to 2.13 earlier this morning, 10yr yields are back down to 2.07 (3.5 bps higher than Thursday's last levels and Fannie 3.5 MBS are down 2/32nds to 101-18.

Despite that bounce back from the weakest overnight and early morning levels, challenges remain.  Our economic calendar is effectively blank to start the week and just because a portion of Friday's momentum has been reversed doesn't prevent it from bouncing back yet again.  Already we've seen stock futures pull bond yields higher from earlier this morning and can definitely imagine a range with more serious support between 2.13 and 2.15 in terms of 10yr yields.  Here's how things have progressed from the wee hours in S&P Futures, 10yr yields, and 10yr contract volumes:

and here's a snapshot from MBS Live:

 

KEY EVENTS THIS WEEEK:

MONDAY:

  • Scheduled Fed buying in the 30yr sector

TUESDAY

  • Producer Price Index - 830am.  Core inflation at the producer level is seen at +0.1 pct after last month's rise of 0.2 pctm while the headline is expected to show a bigger swing from last month's 0.8 pct rise to a 0.1 pct decline this month.  Focus on the core reading, both for the month-over-month metric as well as year-over-year, which is expected to fall to 6.3% from 6.9%
  • Retail Sales - 830am.  Large drops are expected on the headline (1.1 pct gain last month vs an expected 0.3 pct gain this month) as well as excluding the automotive sector (0.6 pct gain last month vs tomorrow's consensus of +0.1 pct)
  • Empire State Manufacturing Survey - 830am.  Forecast: -2.1, which would be an improvement from the previous reading of -8.48
  • Business Inventories - 10am.  Seen falling from last month's print of 0.5 pct to 0.1 pct 
  • Fed-Speak from Bullard, Williams, and Fisher
  • Fed Treasury buying: $4.25 to $5.0 bln in the 6-8yr sector

WEDNESDAY

  • MBA Applications at 7am
  • Consumer Price Index - 830am.  This metric of inflation at the consumer level is expected to have fallen from +0.3 pct last month to 0.0 pct this month.  Excluding the more volatile food and energy components, consumer-level inflation is seen flat at +0.1 pct.
  • Treasury International Capital - 9am, which shows the level of foreign investment in US Treasuries
  • Industrial Production/Capacity Utilization - 915am.  Industrial Production is expected to have risen to +0.4 pct versus last month's +0.2 pct and capacity utilization to be slightly higher from a previous reading of 77.4 pct to a current reading of 77.6 pct
  • NAHB Housing Market Index - 10am - Seen flat at an index value of 18.0.
  • Fed Speak from Rosengren

THURSDAY

  • Housing Starts - 830am.  Starts and permits are both forecast at a 605,000 annual rate vs 658k and 594k annual rates in the previous report.
  • Jobless Claims - 830am.  Seen at 395k vs last week's 390k
  • Philadelphia Fed Survey - 10am.  This "business conditions" survey had a huge bounce back from historically weak readings recently in the negative 30 range to +9.0.  Thursday's consensus calls for +8.7
  • Fed Speak from Pianalto

FRIDAY

  • Leading Economic Indicators - 10am - Seen improving to +0.5% versus last month's reading of +0.2%
  • Fed buying $2.25-$2.75 Treasuries in the 30 year sector