Wednesday afternoon saw a reversal of the morning trading. Rates were trading lower than the previous day most for most of the session. In the last couple of hours they changed course and the 10-year Treasury closed +.0085 with the yield at 4.620%.

FED Chair Ben Bernanke responded to some congressional questions that caused some small concern among bond traders. He said that inflation remains the Fed's "predominant concern". “Overall, the economy appears likely to continue to expand at a moderate pace over coming quarters," Bernanke said. He said he does not see a recession this year.

"Bernanke stuck to his guns on the economy and inflation and in his written testimony does not appear to have deviated from last week's policy statement, leaving yields to float back up to 4.60% on the 10-year," said analysts at research firm Action Economics.

TODAY

Rates are only up a slight amount and have been trading flat most of this mornings trading session. The rate of increase on the 10-year Treasury has fluctuated between +.002% to +.008%. In the market’s opening, and at mid-morning there was a small spike as traders on the two coasts woke up. The spikes were up to 4.638% which was +.018%. This is fortunate as most of the data would have driven rates up higher.

The 10-year Treasury is +.008% at 4.628%

The biggest surprise of the day was the 1^st Quarter final-GDP. Economists were expecting a +2.2% reading. GDP surprised all with a +2.5% growth in the first quarter. By itself, this should have pushed rates up far.

The weekly Initial Jobless claims also should have pushed rates higher as it again came in lower than expected. This is the third weed that has happened. As an inverse indicator a lower than expected number is bad for rates since it is good for the economy. The ‘experts’ were predicting 315k to 320k filings for unemployment insurance. The Labor Department reported only 308,000 did.

It appears that the item that the bond market is paying the greatest attention to is the Chain Deflator. It is a portion of the GDP report, and measures inflation. As a measure of inflation it should not be a surprise that it is being watched closely by bond investors. Analysts were predicting a +1.7% across the board. The Chain Deflator came in as expected at +1.7%. As a measure of inflation, Chain Deflator is probably the day’s most important item for the bond market. That is why rates are flat despite GDP and Jobless number.

At 09:00 the Help Wanted Index was at 31; in line with the 31 to 32 range of forecasts.

Corporate Profits for 4th quarter were at +16.0% annualized. While that sounds high, it is, it is so old, that it never affects rates.

TOMORROW WILL BE A VERY HEAVY DAY…

…in terms of the data out. Since it is such an intense level of data, and because we have no guess on most of the items at this time, we will refrain from trying to guess what will happen. We reserve the right to make statements later today.

Personal Income and Spending are at the opening and do influencer rates on a common basis. Oddly, both are predicted to be +0.3% by all the sources. That makes personal Income much lower than last month’s +1.0%. Last month was a surprise as it came in higher than expected, and did move rates upward. Personal Spending is also predicted lower than last month’s +0.5%.

At 08:45cdt {13:45gmt}, the Chicago Purchasing Managers Index (PMI) is expected to be higher than last month’s 47.9. Expectations range from 49.0 to 50.0.

AT 09:00cdt {14:00zulu} Construction Spending is anticipated to straddle the previous month (-0.8%). Construction Spending anticipated at -0.3% to -1.0%. A very important, but unpredicted portion of Construction Spending is the residential construction portion. It is a detail that will need to be watched.

At the same time Construction Spending is released the University of Michigan produces its revised Consumer Sentiment report. The final number of Consumer Sentiment is less important to bonds than the previous. Analysts are expecting it to be at, or a bit lower at 88.5 to 88.8.

[Publisher’s note: In an attempt to clean up our blog, we will post all three outlooks on Monday only. We will post an outlook on days when one is modified.]

Steve Boxmeyer [612] 799 – 6858
steve@LendWithIntegrity.com