Reply #31: I posed that question to a friend ..... his response

[divvy]

Recent weak economic data has pushed back the market's estimate for the timing of Fed's first 1/4 point tightening into Q2 2012...the first Fed funds future below 99.75 (0.25%) is April 2012 and conforms with the Eurodollar futures levels as well.

From here on, the market currently suggests we get to 1% (Fed funds) in Q4 2012, 2% in Q4 2013, 3% in Q4 2014...but then flattening out to only 3.5% in Q4 2015. All of this is consistent with recent rallies in most fixed income products. The extrapolated 5 yr Treasury rate 5 years forward is down to 4.42%.

On the inflation front, market views have cooled noticeably with the recent data and drops in commodity prices. TIPs breakevens that estimate inflation rates over various timespans are currently:

5yrs: 2.11% 10yrs: 2.33% 30yrs: 2.46%

Not much real economic news is due before Thurs-Fri. On Thurs, Q1 productivity is expected to be revised to rise 0.1 to 1.7%, and unit labor costs to drop 0.2 to 0.8%. The direction of both anticipated revisions is consistent with diminishing inflation worries.

Bloomberg has the Friday non-farm payrolls consensus at +190k, although other surveys have it a little lower and the whisper numbers are much lower....consistent with the awful new claims and orders/production/zero revision to Q1 GDP. Important GDP drivers inside look flattish, with hourly earnings expected up 0.1% and the workweek expected to be unchanged.

I read yesterday noted that the whisper payrolls number is so low and so widely whispered -- under 100k -- that by the time we actually get the release, 150k might knock bonds down a bit.

FWIW, this backdrop is generally consistent with FI moving to modestly lower rates over the next month or so as 1) Greece and the PIIGS shake the Euroland sov and banking credit picture, 2) econ data continue to come in on the weak side, and 3) as Fed buys another $100-ish billion Treasury coupon issues before 6/30 while NO NET NEW SUPPLY arrives (probably) 'til August when the debt ceiling is likely raised.