The Hightower Report

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The Treasury market forged a quasi downside breakout overnight but the market was able to reject that move and partially regain its footing into the US Thursday trade action. Once again overnight economic news from the Euro zone fostered fears of weakness, as Euro zone manufacturing technically returned to a contracting status with its decline back below 50.0. However, the focus of the trade is likely to shift fully toward the US economic report slate, with claims, Productivity, Construction spending and an ISM manufacturing Index released this morning. The market will also be presented with Federal Discount rate window borrowings, foreign central bank holdings, A Fed speech and a flurry of domestic auto sales figures and therefore the market is likely to come away from the next 48 hours, with a more definitive view toward the US economy. With today’s data also coming in just ahead of monthly payroll data on Friday morning, price action today might be partially restricted, as some traders wait for the government’s primary monthly measure on Friday morning. While the market has alternatively embraced expectations of additional easing from the US Fed at some point in the near future, the trend of the data over the last two weeks has clouded the expected timing of additional easing. In fact, with a divided Fed apparent from the last meeting minutes and recent dialogue reiterating that conflict, there are some “fence sitters” in voting positions at the Fed and therefore it could take a below expectation non farm payroll reading just to give the easing stance the upper hand again. With a quasi downside breakout in ongoing claims last week, putting that measure at the lowest level since September of 2008, the continuing claims reading this morning could preempt the monthly reading on Friday morning. However, some economists are discounting the downside breakout in ongoing claims and that could leave the initial claims as the key event of today’s action. On the other hand, Productivity readings could take on added importance, as some Fed members might want the added cushion of strong productivity trends, to go ahead and add further easing to the equation. It does seem as if QE3 is regaining some credence, but given the political and economic stigma attached to that form of support, it could still take clear cut recession fears to see a quick implementation of fresh easing from the Fed. In the end, seeing ISM manufacturing readings this morning fall back into a contractionary posture could be enough to convince traders that more easing is on the way.

Below is a sample of The Hightower Report’s Daily Commentary. To get this comment, and our daily coverage of 15 additional markets and trade ideas, visit futures-research.com for your free 2 week trial!

The rumored downgrade of the US has echoed around the globe over the weekend and at least initially equities are down hard, gold has exploded and most commodities are being deflated. While September bonds are times were almost as much as 4 full points below last Friday’s highs, in the wake of the ratings cut, they have partially recovered, despite the threat of yet another downgrade for the US in the coming 6 months in the event that more spending isn’t cut. With 2 year notes at times reaching record low yields, in the wake of the post Friday close downgrade, the trade saw some flight to quality flow toward US Treasuries.

In addition to the downgrade, the US will have to contend with a series of auctions and an FOMC meeting this week. At least to start the week, the US scheduled data flow will be limited, but the markets might still be a little shell shocked in the wake of the better than expected US Non farm payroll report from last Friday. The market also sees some minor confidence off news that the ECB launched a program of buying of certain Euro zone bonds, which for the time being has reduced the threat of a breakdown in Euro zone debt instruments.

From Washington, the blame game has made it clear that many legislators still don’t hear what the ratings agencies are saying, which is that even more deficit reduction is required. In fact, until the Special Committee is heard from and the US offers up more credible deficit reduction moves, the threat of another downgrade and a risk off environment might be expected to prevail. In short, the markets seem to equate further slowing with US financial turmoil, but according to recent Fed statements, it will take signs of falling inflation for the Fed to make any fresh policy moves. However, sentiment for the Tuesday FOMC meeting is already expecting the Fed to soften its official stance, with its “low rates for an extended period of time” mantra back in the spotlight.

The Commitments of Traders Futures and Options report as of August 2nd for U.S. Treasury Bonds showed Non-Commercial traders were net short 49,773 contracts, a decrease of 8,913 contracts. The Commercial traders were net long 34,391 contracts, an increase of 5,212 contracts. The Non-reportable traders were net long 15,381 contracts, a decrease of 14,125 contracts. Non-Commercial and Non-reportable combined traders held a net short position of 34,392 contracts. This represents an increase of 5,212 contracts in the net short position held by these traders. The Commitments of Traders Futures and Options report as of August 2nd for US Treasury 10 Year Notes showed Non-Commercial traders were net short 41,765 contracts, an increase of 55,352 contracts which represents a change from a net long to net short position. The Commercial traders were net long 55,580 contracts, an increase of 32,236 contracts. The Non-reportable traders were net short 13,816 contracts, a decrease of 23,114 contracts. Non-Commercial and Non-reportable combined traders held a net short position of 55,581 contracts. This represents an increase of 32,238 contracts in the net short position held by these traders. Given the net spec short positioning in bonds and notes some of the buying in the market of late could have been classic short covering.