MBS OPEN: Red on the Board After Data

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So far this AM

  • NIKKEI, HANG SENG, TOPIX, KOSPI, FTSE, DAX all lower. But the CAC is higher!
  • Overnight, S&P futures were up then sideways then down, and now up again.
  • TSY prices higher until 3am EST....lower since then...

  • Fed's Lacker Says...ECONOMIC OUTLOOK IS IMPROVING; RECOVERY LIKELY TO BE SLOW AND UNEVEN FOR SOME TIME. ECONOMY APPEARS TO HAVE LEVELED OUT, CONDITIONS REMAIN DISTRESSED IN MANY INDUSTRIES, AGREE WITH FORECAST CALLING FOR Q3 POSITIVE GDP, STEADY GRADUAL IMPROVEMENT AFTER THAT, WILL BE EVALUATING WHETHER NEED TO BUY FULL AMOUNT PLEDGED UNDER MBS/AGENCY BUY PLAN.IF MBS/AGENCY BUYS CONTINUE AT CURRENT PACE, COULD PROVIDE MORE STIMULUS THAN PAST BUYS, LABOR MARKET A PRIME CONCERN, WEAK INCOMES WILL LIKELY DAMPEN CONSUMER SPENDING GROWTH, UNPRECEDENTED FED ACTIONS SHOULD UNDERPIN NASCENT RECOVERY, HOUSING NO LONGER MAJOR DRAG ON GDP GROWTH. SIGNS THAT HOUSING PRICES BOTTOMING OUT, BUT ACTIVITY BELOW PACE THAT ACCOMMODATES INCOME GROWTH.RAISING RATES DEPENDS ON PACE OF RECOVERY, GROWTH AT LEVEL WHEN HIGHER RATES NEEDED. MAY HAVE WAITED TOO LONG TO RAISE RATES IN 2003, 2004, WILL TAKE THAT ON BOARD AS MAKE DECISION CURRENTLY. CHINA NATURALLY CONCERNED ABOUT INFLATION, BUDGET DEFICIT, WANT ASSURANCES FED NOT MONETIZING DEBT.NOT SURE WHETHER HIGHER DEFICIT WILL CAUSE FED TO RAISE RATES SOONER RATHER THAN LATER.IF DEFICIT WAS LOWER, CONCEIVABLE FED COULD WAIT LONGER TO RAISE RATES

Recap of Yesterday

  • Slow day in primary and secondary mortgage market
  • Fed soaked up about $1.5 billion from mortgage bankers. Servicers added some convexity to their portfolio (rate sheet influential coupons).
  • 5 yr note auction successful. TSYs trade higher (price) after auction
  • S&P not making progress in either direction. Range tightened yesterday as lower highs and higher lows were made. Here's the chart illustrating the range...

  • Mortgage Rate Negative outlook: holding this range in stocks makes it easier for market to accept these price valuations in the future.
  • Mortgage Rate Positive Outlook: TSYs continue to trade well regardless of data and stock lever....cannot stress this enough: NO TREND IS CONFIRMED, market is day trading the curve ahead of and after supply. Find the weak spots and exploit em!
  • This week doesn't mean much in the grand scheme....unless the market builds on this move higher after Labor Day.
  • Fundamentals are phooey...except when it comes to health of consumer. Recent rising trend in unemployment claims = bad implications for consumer.
  • More outlook: Worried about the possible effects of a "better than expected" back to school retail sales season. Expectations are low...shopper will still buy but will do so at discounts (chase quality at low price).

In the time it takes to type (IMPORTANT STUFF IN HERE)

  • Jobless claims -570k vs. consensus of 565k
  • last month 580k
  • 4 week moving average fell to 566,250 from 571k
  • continuing claims fell to 6.13 mln from 6.252 mln (lower than expected)
  • insured unemployment rate fell to 4.6% from 4.7%
  • this is right in the middle of the pack in the mix of previous readings and expectations (higher than expected, but less than previous)
  • preliminary GDP better than expected, down 1.0 pct versus consensus for -1.5% drop.
  • Exluding autos, GDP down 1.2%
  • CORE PCE + 2.0 MoM and +1.6 YoY, both as expected and same as previous month
  • Business inventories down a record 159.2 bln versus 141.1 bln previously

All of this has had a rather desultory effect on prices across the board. 10yr down 13 ticks to 3.48 (not too bad in the yield context eh?).  MBS 4.5's down 10 ticks and after some major drops, stops, reversals, more drops, and a lot of generally choppy price action, this 10 tick drop brings us exactly to.....  PAR  what else? 

MBS, Tsy, and LIBOR Quotes