U.S. jobless claims fell by 16,000 in the week ending Oct. 11, coming in at total of 461,000, below the consensus of 470,000.

On the inflation front, the Bureau of Labor statistics reported that headline CPI for September came in flat while economists were expecting a 0.1% increase. Monthly core CPI, the inflation measure most closely watched by markets, fell more than expected, rising 0.1% versus expectations for a 0.2% gain.

U.S. equity futures are trading higher with contracts on the Dow Jones industrial average up 150 points to 8654, the S&P 500 up 17 points to 920 and the Nasdaq up 25 points to 1254.

Economists and strategists agree that inflation won't be a concern for the Fed as markets continue to expect further interest rate cuts. T.J. Marta, fixed income strategist from RBC, said he is looking for the Fed to cut rates a further 50 basis points before the end of the year.

"Overall inflation is rolling over with the collapse in commodity prices while core inflation is remaining stickier and will take a few months longer to begin to abate. The jobs market continues to deteriorate, with continuing claims clearly signaling a recession. In tandem, this provides an economic (not merely financial crisis) reason for continued Fed easing," he said.

The strong rally in futures is putting pressure on the U.S. treasury markets this morning, led by the belly of the curve.

"The market is taking solid direction from the data, with the front-end selling off as the curve flattens, with 2s/10s at 235 bp and stocks pushing to the highs of the day," said Ian Lyngen, interest rate strategist from RBS Greenwich.

U.S. two-year yields are up 10.5 bps to 1.66%, with five-year yields up 11.2 bps to 2.93%, 10-year yields up 7.2 bps to 4.02% and 30-year yields up 4.9 bps to 4.24%. The Eurodollar March 09 contract is down 1.5 ticks to 97.66. The yield curve is flatter, with the 10/2-year spread down 2.5 bps to 236.18 bps.

In Canada, Statistics Canada reported business slowed sharply for Canadian manufacturers in August, with sales down 3.7% from the previous month to $52 billion.

Yields on two-year Canadian government bonds are up 2.8 bps to 2.31%, with five-year yields up 2.2 bps to 2.98%, 10-year yields up 0.8 bps to 3.77% and 30-year yields up 1.3 bps to 4.20%. The December 08 BAX contract is down 1.0 ticks to 97.49.

The Canadian 10-year note is yielding 24.59 bps less than the U.S. 10-year note.

Overseas, the Bank of England announced Thursday three major reforms will be implemented to improve the functioning of its market operations. The central bank also introduced two new permanent facilities for banks to better access liquidity during difficult economic circumstances.

In an effort to help stabilize the financial system, the Swiss National Bank announced that it would be extending a maximum of $54 billion in loans to take over illiquid assets from UBS.

Yields on UK two-year bonds are up 0.8 bps to 3.85%, with five-year yields down 1.6 bps to 4.45%, 10-year yields up 7.3 bps to 4.78% and 30-year yields flat at 4.67%.

In Germany, returns on two-year German bonds are down 10.5 bps to 3.02%, with five-year yields down 2.4 bps to 3.68%, 10-year yields up 1.4 bps to 4.14% and 30-year yields up 3.8 bps to 4.67%.

Currency markets are relatively unchanged with the U.S. dollar remaining mixed this morning. The Canadian dollar is up 0.0045 to 0.8424 against the U.S. dollar (1.1871 USD/CAD) and up 1.09 to 84.99 against the yen.

The U.S. dollar is up 0.97 to 100.92 against the yen and the Dollar Index is up 0.178 to 82.228.

The euro is down 0.0028 to 1.3472 against the U.S. dollar, down 0.0087 to 1.5995 against the Canadian dollar, up 0.0023 to 0.7839 against the pound sterling and is higher by 1.01 to 135.95 against the yen.

The pound sterling is down 0.0081 to 1.7188 against the U.S. dollar and down 0.0173 to 2.0403 against the Canadian dollar.

WTI crude oil is down $0.70 to $73.84. The front month gold contract at the Chicago Board of Trade is down $17.90 to $832.80 per ounce.

All data taken at 9:20 a.m. EDT.

By Neils Christensen, This email address is being protected from spam bots, you need Javascript enabled to view it , edited by Nancy Girgis, This email address is being protected from spam bots, you need Javascript enabled to view it

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