Durable goods orders expected to show modest +0.5% gain -- Today's April durable goods orders report is expected to show a gain of +0.5% m/m, reversing March's -0.5% decline. March durable goods orders were down -10.6% on a year-on-year basis but should start to improve significantly on a year-on-year basis in coming months due to the weak year-earlier base. On a year-on-year basis, the series hit a cyclical low of -22.6% back in September. Durable goods orders are expected to firm up in coming months as businesses are forced to replenish low inventories and as demand is confirmed. April retail sales soared by +1.2% which depressed inventory levels. Excluding transportation orders, which are expected to be weak, April goods orders are expected to rise +1.0% after March's -0.1% decline.

Claims are expected to move lower -- Unemployment claims in the week ended 18 are expected to fall -8,000 to 410,000. Claims in the past 2 weeks have remained around the 420,000 area versus the 390,000 area seen before the mid-March surge to 492,000 tied to the extension of unemployment benefits. The slow decline in claims in the past several weeks is evidence of continued softness in the US labor market.

Gold edges to another new 2-year high -- Cash gold yesterday rallied to another new 2-year high of $319.65. Gold has rallied by about $12 in the past week and by more than $50 in the past year. June gold futures yesterday closed -$2.80 at $318.90. Gold rallied yesterday on continued strong technicals, the ongoing tensions related to terrorism and to the Middle East and Indian subcontinent, and yesterday's continued weakness in the dollar.

Crude oil continues lower from last week's 8-month high -- July crude oil prices yesterday fell -13 cents to $26.30 and posted a new 2-week low of $26.15. The market is now down $2 from last Tuesday's 8-month high of $29.45 on the weekly nearest futures chart. That sell-off was mainly due to Russia's rejection of the export restrictions it had agreed to as part of a deal with OPEC. The market slid yesterday on the late-Tuesday API report which showed a 5.6 million barrel rise (+1.8%) in US oil inventories, the first rise in 3 weeks. Gasoline inventories fell 0.5% and distillate fuel inventories fell 0.1%. Refiners were running at 91.4% of capacity, down 1.1 percentage points from the previous week.

US Interest Rates -- US credit market continues higher -- Futures closes: USM02 +0-18 at 101-26; TYM02 +0-120 at 106-000; FVM02 +0-090 at 106-225; TUM02 +0-037 at 104-247; EDZ02 +.0550 at 97.0400. Cash closes (3PM NY): cash 30-yr +0-15 at 96-13; cash 30-yr yield -.034 at 5.629; cash 10-yr +0-11 at 98-09; cash 10-yr yield -.045 at 5.102; cash 5-yr +0-08 at 99-26; cash 5-yr yield -.057 at 4.418; cash 2-yr +0-170 at 002-200; cash 2-yr yield -.059 at 3.165; 3-mo T-bill -.020 at 1.690.

June T-bonds yesterday posted a 1-1/2 week high and are now in the upper half of the range established by the early-May sell-off from the 2-1/2 month high of 103-04 (May 1) and last Tuesday's 1-month low of 99-27. Dec Euros yesterday posted a new 2-week high of 97.090 and stopped just 1 bp shy of the early-May 6-1/2 month high of 97.100.

Bullish factors included (1) early weakness in US stocks, (2) continued nervousness about the spate of terrorist warnings by US officials and about whether there may be an attack over the Memorial Day weekend, (3) additional flight-to-quality support from another suicide bombing in Israel (which increases the chances for another Israeli incursion into the Palestinian territories) and from the high tensions between India and Pakistan who continue shell each other across the Line of Control in Kashmir, (4) another coupon pass yesterday which soaked up more secondary supply, and (5) lower crude oil prices.

Bearish factors included (1) yesterday's upward rebound in stocks, (2) yesterday's new lows in the dollar which discourages foreign investment in US securities and contributes to US import inflation, (2) yesterday's continued rally in gold prices to a new 2-year high, and (3) the $2 billion boost in the size of the 2-year T-note auction to $27.0 billion.

The Treasury yesterday announced that next week's 2-year T- note auction will be $27.0 billion, up from the $25.0 billion size seen in the past 4 monthly auctions. That was on the higher end of expectations. The larger 2-year was made necessary by the Treasury's cut in this week's 4-week T-bill auction to $18 billion (from $25 billion) and by the Treasury's poor revenue situation.

US Stock Market -- US Stock Index Settles: Dow Industrials +52.17 at 10157.9; S&P 500 +6.14 at 1086.02; SPM2 +2.00 at 1085.10; NASDAQ Composite +9.26 at 1673.45; Russell 2000 -1.55 at 493.91. NYSE volume yesterday remained light at 1.14 billion, below the 3- month average of 1.31 bln shares. Market breadth was slightly bullish with 1,614 advancing shares versus 1,549 declining shares.

June S&Ps and the cash S&P index yesterday extended the 3- session downmove from last Friday's 1-month highs of 1109.10 and 1106.59, respectively, to new 1-1/2 week lows but then recovered modestly. The indexes are still well above the recent 7-month lows of 1045.80 and 1048.96, respectively, posted in early May. The cash Nasdaq 100 yesterday remained well below last Wednesday's 1- month high of 1350.54. The Dow Industrials remained well below last Friday's 1-1/2 month high of 10,353.43.

Bullish factors included (1) some short-covering after the sharp sell-off seen early this week, (2) a rally in Johnson & Johnson (+$1.36 to $62.00) on a positive study on its drug-coated artery stent, (3) the continued rally in the US credit market with Dec Euros nearly posting a new 6-1/2 month high.

Bearish factors included (1) continued concern about the terrorist warnings and whether they will damage consumer and business confidence, (2) underlying concerns about weaker than expected US economic growth and lackluster earnings, and (3) yesterday's continued weakness in the dollar which deters foreign investors from investing in the US stock market.

Forex -- Dollar closes (3PM NY): Dollar closes (3PM NY): cash dollar index -.44 at 112.33; dlr/yen +.11 at 124.21; dlr/Swiss -.0082 at 1.5686; stlg/dlr -.0017 at 1.4582; USD/CAD -.0053 at 1.5332. Euro closes: euro/dlr +.0063 at .9263; euro/yen +.85 at 115.01; euro/Swiss +.0023 at 1.4532. Futures closes: DXM02 -.48 at 112.46; JYM02 -.0020 at .8062; ECM02 +.00620 at .92520; SFM02 +.0032 at .6377; BPM02 -.0008 at 1.4566; CDM02 +.0022 at .6518.

The dlr/yen yesterday posted another new 5-month low of 123.53 before recovering somewhat on the BOJ's intervention. The euro/dlr yesterday posted a new 7-month high of .9276, which was only about 1/2 cent below the 14-month high of .9331 posted last September.

Bearish factors for the dollar included (1) continued technical weakness with the new low in the dollar/yen and the new high in the euro/dollar, (2) continued capital flows into the yen as investors seek investment bargains if the Japanese economy is in fact bottoming, and (3) underlying concerns about weaker than expected US economic growth and the massive US current account deficit.

The dollar/yen yesterday closed just slightly higher despite BOJ intervention that was confirmed by Japanese Minister Shiokawa. The inability of the dollar/yen to hold the initial gain on the intervention exposed the extent of the dollar/yen's underlying weakness and will only encourage more selling in coming days.

The BOJ's intervention yesterday was the first since last September. Yesterday's intervention was not surprising given the warnings by top Japanese officials early this week. The Japanese government is desperate to keep the yen's value down since it is relying on exports to be the engine to drive the Japanese economy out of recession. Mr. Shiokawa yesterday said that Japan sold yen because the yen's rise was "too rapid" and "abnormal." He said that, "Such a rapid rise is troublesome to everyone." He also said that Japan doesn't plan to ask other nations to join in the yen intervention effort. The US would be unlikely to join the intervention in any event given the US Treasury's hands-off policy toward the currency markets. However, the Fed could sell yen for the BOJ's account if the BOJ wants to extend the intervention into the US trading session.

UK -- The Bank of England at its meeting earlier this month on May 8-9 voted unanimously 9-0 to leave interest rates unchanged, according to the minutes of the meeting released yesterday. The minutes said, "The prospects for the world economy now appeared to be a little less strong than had seemed likely a month ago.... The rapid recovery in the United States, associated in large part with the stock cycle, had faltered in the past month and it seemed probable that the pace of the recovery there would not moderate." The minutes suggest that the MPC is not close to raising interest rates and that a rate hike is not likely until July or August.

European closes -- Closes: June Bunds +.11 at 105.80, Dec Liffe Euribor +4 bp at 95.840, June gilts +.08 at 111.59, Dec short-sterling +7 bp at 94.880, Eurotop 100 -42 at 2666 (-1.53%).

The BOJ in its monthly report released yesterday joined the government in upgrading its assessment of the economy for the third straight month. The BOJ said that, "The pace of deterioration in Japan's economy has moderated.... Production is starting to pick up, reflecting the increase in exports and progress" in reducing inventories. However, the BOJ said that a recovery will be "modest" because of weak consumer spending and because business investment will continue "follow a down-trend for a while." The BOJdid not go as far as the government in declaring that the recession is over.

Japan's Q1 GDP was up sharply by +2.2% q/q and 8.9% y/y, according to a survey of six research companies polled by the Nihon Keizai newspaper. The poll showed average expectations for a 7% y/y rise in exports and a 2% q/q rise in consumer spending. The government will release the Q1 GDP report on June 7.

Japanese Markets -- June SGX 10-year JGBs yesterday closed -.01 at 138.62, posting a new 3-week low and falling farther from last Thursday's 6-month high of 139.12. Bearish factors centered on the strong industry index report. However, JGBs were supported by theBOJ's less optimistic view of the economy than the government and by today's very strong auction of $10.4 billion in 10-year JGBs yesterday where the bid cover ratio was more than 10 to 1 versus the last auction's cover of 2.3 times. Dec SGX Euroyen yesterday closed +0.5 bp at 99.870, slightly below the contract high of 99.885. The Nikkei index yesterday closed +161 at 11,962, edging to a new 2-month high of 11,963. That was only mildly below the 9-month high of 12,034 posted on March 11. Japanese stocks were boosted by the favorable industry index report which boosted banking, telecom and retail stocks. Stocks were also supported by the BOJ's intervention to curb the yen's strength which is hurting Japanese profits.