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Market Insider: Thursday Look Ahead

May's retail sales data and weekly unemployment claims could sway markets ahead of Thursday's open, but trading will revolve once more around the Treasury's afternoon auction.

On Wednesday, stocks dipped to their lows of the day after a sloppy, reopened 10-year auction and a brief run in the 10-year yield to 4 percent. The Dow finished the day though well off its lows at 8739, a decline of just 24 points. The S&P 500 was 3 points lower at 939.

At the same time, an early sell off in the dollar reversed, driving many commodities lower and taking the dollar higher. The energy complex, however, went against the trend, and oil moved higher, after inventory data showed lower than expected supply. Crude finished the day at $71.33 per barrel, its highest settle since October.

From Fast Money

Stocks have treaded sideways this week, as traders have focused on shifting trends that have taken rates higher. The Treasury market has been pressured by concerns about huge amounts of new supply, as the federal government funds its programs to rescue the economy. The dollar, meanwhile, has responded in the last several days to the resulting move up in yields, as investors sell Treasurys and speculate the Fed could raise rates.

"The (stock) market is getting a teeny bit tired, but the path of least resistance is probably still up. We've had a lot of reasons to sell off and we haven't. We also haven't exploded to the upside," said Tim Smalls of Execution LLC.

The Fed Beige book, reported during the afternoon Wednesday, also said economic conditions remained weak and even deteriorated in some regions, but stock traders were more focused on the action in Treasurys.

"We're still in a period of flux, where it's going to be moves one way, and then moves the other way, until everything settles into some sense of normality. I haven't ever seen so many equities traders glued to the screen to see the results of a Treasury auction as I've seen in the last couple of weeks," Smalls said.

Tension in Treasurys

The 10-year Treasury finished the day off 20/32 to 93-12/32. Its yield moved to 3.937 percent at the end of the day, after briefly touching 4.002. The $19 billion auction finished at 1 p.m.On Thursday, the government will auction $11 billion in 30-year debt, putting the total issuance for the week at $65 billion.

Mortgage traders said some of the action in longer-dated Treasurys came as traders sold Treasurys to hedge mortgage-related trades.

"My guess is we won't see higher yields than we saw today in the 10-year," said Cantor Fitzgerald's Brian Edmonds of Thursday's market.

Dollar Dilemma
The dollar finished Thursday 0.6 percent higher against the euro , at a level of $1.3993.

"We think the key drivers in the dollar is just what's happening to U.S. yields," said Adam Boyton, foreign exchange strategist with Deutsche Bank. "That's really supplanting the previous correlation where the dollar was tied between equities markets and euro dollar."

Boyton said, however, he expects the trend to be temporary and he does not expect the Fed to raise rates. The dollar could reverse at a level of about $1.35 per euro. "I would be buying euros there, but we may not get there. It's really being driven by the market's flirtation with the Fed rate hike coming back to the agenda," he said. Boyton.

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Brown Brothers Harriman chief currency strategist Marc Chandler also believes the euro will move higher. "This choppy price action is the market chasing its own tail," he said. "... Everything said and done, this is a shallow pull back in the foreign currencies ... I would just think a lot of this is about market positioning — short term positioning. Most people are bearish the dollar and they keep getting burned on these pull backs."

Comments from Russia that it was lightening its position in U.S. Treasurys in favor of IMF SDR bonds worried the market early, and pressured the dollar. But the dollar shook off the concern. "It's much more politics than economics. The Russians have more than $120 billion in Treasurys, and they're talking about $10 billion," said Chandler.

Chandler said Russia like other big U.S. dollar holders, has pared back its agency holdings. In a note, Brown Brothers strategists wrote: "Attempts to lessen the dollar's preeminence is a calculated move on the part of Russia and China, in our view. Russia comments also come ahead of President Obama's visit to Russia next month, and such noise typically picks up ahead of time as Russia tries to set the table for discussions."

What To Watch

May's retail sales are expected at 8:30 a.m., and are expected to show an increase of 0.5 percent. Weekly jobless claims, also at 8:30 a.m.. are expected to be 615,000. Business inventories are released at 10 a.m.

Perhaps one of the more interesting events of the day will be the 10 a.m. hearing before the House Oversight Committee on the controversial purchase of Merrill Lynch by Bank of Americaat the end of last year. Bank of America CEO Ken Lewis is in the hot seat.

The Wall Street Journal reports that emails show that Fed officials criticized Bank of America and Lewis for trying to back out of the purchase. The newspaper also says that Fed Chairman Ben Bernanke was willing to threaten removal of Lewis if he didn't go through with the deal.

Also on Capital Hill, Rep. Barney Frank's House Financial Services committee conducts a 10 a.m. hearing on how compensation practices contributed to financial collapse.

President Obama, meanwhile, holds a town hall on health care reform just after 1 p.m. in Green Bay, Wis.

The Senate is expected to vote on a bill that would give the Food and Drug Administration authority to regulate the tobacco industry. A similar bill has passed the House.

Questions? Comments? marketinsider@cnbc.com

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

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