Markets everywhere continue to shun risk in favour of security this morning, causing our bond market to rally further still.

The sharp rise yesterday afternoon carried into this morning’s early trading activity, and is primarily the result of the deterioration of the financing situation in Greece. The EU and IMF have set aside their differences and agreed on the disbursement of the next tranche of aid, however the Greek government has been having considerable difficulty adopting the austerity measures upon which the aid is dependant. The cabinet is being reshuffled and the government will face a confidence vote on Sunday – it is by no means certain that it will survive that vote. To say that this uncertainty has made markets very uneasy is an understatement.

It is quite likely that rates would have been even lower this morning were it not for a better than expected print on Initial Jobless Claims in the US. Last week, 414k people lost their jobs, marginally better than the 420k that had been expected, and also encouraging in the sense that the market had been overly optimistic on this measure in recent weeks.

Canadian bond yields are in line with yesterday’s levels, with the only data of note out today being a disappointing ADP print in the US. The reading of 179k new private sector jobs was lower than the 198k expected, and also down from the 207k level for March. So, the US labour market is healing, but at a rate below already modest expectations.

At 10am, the US ISM Non-Manufacturing Composite is released.

The week ends off with a flurry of valuable data:

Canada: Building Permits (Thu), Employment Report & Unemployment Rate (Fri)

USA: Productivity, Weekly Initial Jobless Claims, Weekly Continuing Jobless Claims (Thu), Employment Report, Consumer Credit (Fri)

Rates are up substantially this morning following comments from a voting member of the Federal Reserve that the economy may be strong enough to allow the Fed to begin raising rates soon. Additionally, data out of the US this morning indicates that Personal Spending in February grew 0.7% (exp. 0.5%), adding to the selloff, on the notion that “Americans are more willing to open their wallets”. The fact that spending grew faster than Personal Income, and that the growth in spending is driven in large part due to rising energy prices appear to not bother the market.

Over the next couple of days, releases include:

-          US: S&P/Case-Shiller Home Price Index, Consumer Confidence (Tue), ADP Employment Report (Wed)

-          Canada: Industrial Product Price Index (Wed)

With so many moving parts globally, it is not surprising that investors are generally continuing to play it safe, taking bond yields lower once again (vs. yesterday’s close but higher than yesterday’s open).

The nuclear-related concerns in Japan are not to be taken lightly, but as the initial shock of the Japanese events subsides, we are reminded that unrest in the middle east is continuing (Bahrain, Libya), and that peripheral eurozone nations still have not solved their fiscal troubles. In short, there is plenty of reason for caution.

In terms of North American numbers, Canada’s Manufacturing Sales growth for January was 4.5%, well in excess of the +1.0% growth that was expected. Growth was largely driven by a pickup in autos and related activity.

Down south, the US reported that Housing Starts fell (again) in February to 479k annualized  (exp. was 566k but historically this number has been closer to 1.5MM) confirming that the housing/construction market is even weaker than the very modest expectations the market has developed). Further, various Producer Price measures in the US were up significantly, perhaps showing the effects of the weak dollar.

Remember, US CPI on Thursday and Canadian CPI on Friday.

The bond market is roughly in line with yesterday’s closing levels, following a decent employment report out of the US this morning. Nonfarm Payroll growth of 192k was largely in line with expectations, while growth in the Private Payrolls and Manufacturing Payrolls components were slightly better than expected. Also, there were some upward revisions to the weak January report. One gets the sense, however, that given strong ADP numbers on Wednesday, encouraging weekly and continuing claims yesterday, and an artificially weak January jobs report, the market is disappointed that this morning’s report wasn’t materially better than published forecasts.

The real weakness in the report was that the US Unemployment Rate fell to 8.9% from 9.0% last month, but had actually been expected to rise to 9.1% as formerly discouraged workers were expected to start wading back into the job market. Evidently, job prospects are less appealing on the ground than commonly believed, because these workers don’t seem to be reinitiating their job searches. This weakness in underscored by a lack of earnings growth for employees, and flat weekly hours also included in this morning’s report.

There is some additional data coming out at 10am (US Factory Orders, Canadian Ivey PMI) .

Bonds have sold off very mildly vs. last night’s close on the back of mixed US data.

The key data out this morning shows that US GDP grew at a 3.2% annualized rate in the 4^th Quarter of 2010, which was actually below consensus estimates of 3.5%.

Despite this ‘disappointment’, the market seems to be taking strength from the fact that the Personal Consumption component of GDP grew by 4.4% in the quarter, higher than the 4.0% that had been expected. It is likely that you will see articles declaring that the US consumer is ‘back’ over the next day or two.

Canadian December GDP is out on Monday.

The bond market has rallied modestly this morning following the selloff late yesterday.

Largely responsible for stabilizing yields this morning are the US CPI numbers for November, which at 0.1% MoM, were lower than market expectations for 0.2%. These serve as a reminder that while the market has moved to price in certain events, the inflation is not yet evident.

Other positive data in the US include the Empire Manufacturing Index for December at 10.57 (exp. 5.0), growth in Industrial Production for November of 0.4% (exp. 0.3%), and an uptick in Capacity Utilization to 75.2% (exp. 75.0%).

The only Canadian data out this morning was October Manufacturing Sales which were up 1.7% (exp. 1.0%).

In summary, lots of data suggesting the economy is moving in the right direction, but if inflation lurks, it remains well hidden.

The bond market is continuing to sell off this morning as the recent wave of optimism continues. Qualitatively, a lot of the improvement appears to be the result of steadying nerves in Europe as the investment community seems to be accepting the merits of the various support mechanisms that have been put in place.

Positive data, however, is somewhat limited on the day. Pending Home Sales in the US were up 10.4% MoM in October (exp. -1.0%), a rather large ‘beat’, while the recent positive momentum with respect to employment was tempered somewhat this morning as Initial Jobless Claims for last week rose again to 436k, also above what was expected.

Tomorrow is a very big data day in both the US and Canada. For Canada, we will see Employment numbers for November, while in the US we will get the Employment Report, Factory Orders, and the ISM Non-Manufacturing Composite.

A good part of the recent market sell-off has been due to improving US data including weekly jobless claims and yesterday’s ADP Employment Report. All eyes will be on the US Payrolls number for validation of the direction of labour market being signaled by recent data. Expectations are for +145k.