Today, trading will resume in the US markets following a day of mourning for former president Ford. So, trading start the new year only today, but with an extremely busy and important calendar that contains the December ISM, car sales and ADP employment
report, the construction spending figures for November and the Minutes of the December 12 FOMC meeting.

The market expects the ISM to have risen marginally to 50 from 49.5 previously. The various regional surveys point in different directions. The NY Fed survey and the Chicago PMI showed quite good readings, but the Philly Fed and Richmond surveys
printed a picture of very weak activity in those regions. We suspect the Chicago PMI benefited from extreme clement seasonal (which are much less a factor for the ISM) and so are not impressed by the gains the survey showed in December. Therefore,
we put ourselves on the bearish side of consensus. If the ISM remains below 50, it would be the second consecutive month activity contracted in the manufacturing sector and should support Treasuries.

Car sales should have recovered somewhat from the depressed levels of recently and construction spending should be down again. The ADP employment report might be influential if it deviates from consensus (120 000). The ADP report and the manufacturing ISM will give us some clues about the outcome of the December payrolls, to be released on Friday. For now, we know that December was dryer and warmer than usual which might be a positive, but some other factors (retail sales/construction) might have offset those, leaving us with a provisional payrolls estimate of about 100 000. A full preview of the payrolls will be made public on Thursday and the results of the ADP report might still alter our expectations.

Regarding trading, the new trading year 2007 only starts in earnest today. During the second half of December, Treasuries lost their bullish spin as quite some heavy losses were registered, be it in very quiet and thin end-of-year trading, maybe inspired
by profit-taking following a six month rally. This affected the technical picture that lost its bullish nature. The losses may have been somewhat overdone and therefore if data come out a bit on the softer side of expectations some of the losses may be recouped. In this respect, the market currently discounts only slightly more than a 50% chance of a Fed rate cut towards mid 2007.

So there is again some upside potential (prices) for Treasuries on the condition data come in weakish. So we start the year with a moderately positive view on Treasuries, as long as the bullish technical picture has not been restored, we remain very cautious and look for the price action to convince us that our view may become the majority one. Should the correction higher in yields continues, the 10-year yield should encounter stiff support at 4.84% (Oct. top, cf. graph), where a reaction is expected.
A drop below 4.63% (MTMA) would be a first signal the technical picture is improving.

Source: KBC Bank