A sharp short-covering rally in stocks stopped Treasuries in their tracks Thursday, with pleasant earnings surprises from Yahoo and Aetna the main catalyst. Data was ostensibly firmer, but a large gain in oil prices and port disruptions likely drove trade prices firmer. A sizable 40,000 drop in initial jobless claims back below 400,000 for the first time in seven weeks also gave some optimism to stocks, but post-September 11 seasonals, the port lockout and the Hurricanes likely distorted the data and made it premature to call a turn in the labor market.
The stock bounce had a technical whiff as well, with the S&P 500 bouncing back after a probe below its key 776 50% retrace area after its second try since late July. Some spillover from the across the Atlantic may have featured as well, amid disappointment that the ECB held rates pat, which led to sharp losses on Euribor futures and the two-year Schatz and sent yields backing higher after UK-based fund selling.
The December bond closed 28/32 lower at 113-23, while the curve (2s-30s) held a steeper profile just under +300 basis point. Retail sales and U. Michigan consumer sentiment data are due Friday and could keep Treasuries supported given the dismal numbers factored in.