Retail Sales Disappoint But MBS Lose Ground

"Profit Takers"

Profit takers meaning holders of MBS who saw the price of their investment skyrocket for 2 days straight who thought late yesterday and early this morning would be a good time to sell their investments due to inflation concerns, oil prices, and the Fed's 2 billion being perceived as a temporary solution to a permanent problem.  You've heard the phrase "buy low, sell high?"  That's what happens after we have an unexpected and rapid price improvement in MBS.  Profit takes usually step in at some point.

This is a two day chart of the 5.5% FNMA MBS.  Notice how much we've given back from yesterday.

 One of the factors that is helping prevent a more pronounced slide back down the curve is the weakness of the economic data.  My favorite thing to be bearish on, "consumer participation," continues to show weakness as Retail Sales numbers came in far worse than expected.  Remember, weak spending = weak stocks = more interest in buying bonds = MBS prices go up (price v. demand) = mortgage rates go down.

Jobless claims came in at 353k opposed to estimates of 358k.  This deviation is not significant and will have little impact, if any, on trading this morning.

Import prices came in at a reading that was actually below analysts expectations: .2% vs. .6%.  This is somewhat of an inflation-easing indication which couldn't be better news for the bond markets.  However, much more credence is given to tomorrows CPI report, one of the most important economic reports as far as MBS are concerned.  It appears that technical factors and profit taking or leading traders to hedge their positions in anticipation of tomorrow's data.

A positive or negative piece of breaking news (depending on how you look at it) is the business inventories number coming in at .8% increase, the most in two years.  Some will interpret this as "business stocking up for expected future strength," while others, myself included, view it more as "hey, look at those retail sales numbers, no wonder our stockroom is getting crowded!"  

Though we are down so far this morning, you may not notice that much of an impact to your rate sheets due the the strength late yesterday.  Still, pricing will probably be worse by .125-.375 YSP depending on how your lender dealt with reprices yesterday.

Expect lenders to make you wait before pricing gains into the market.  It's like olympic weightlifting: the MBS market has to prove it can hold up certain price gains before the lenders will give them credit and price the strength (yes, pun intended, couldn't help it) into their rate sheets.  However, just like a weightlifter, if the prices are going to come down, lender's will be repricing with neck-breaking speed. 

Keep a very watchful eye on the markets for any headline financial news.  With the losses and slight rebound from this morning, I would float until further notice, but as always in this tumultuous MBS market, be ready to lock if we are near your acceptable rate threshold.  Stay tuned!