Durable Goods Orders Fall, MBS Advances

By: Matthew Graham

Relevant Data For Today:

  1. Durable Goods, which were expected to rally by 0.7% actually lost 1.7%.  This is significantly weaker than expected and another feather in the cap of the big, bad, recession wolf.  Too bad for the economy yes, but generally speaking, good news for MBS
  2. Mortgage Applications rose by almost 50% likely in response to the recently lower interest rates.  We are seeing the same levels now as earlyFebruary.  Low rates stimulate refinance applications and also bring some buyers off the sidelines.  In addition, the ripe foreclosure market is generating purchase applications as well.  Finally, the increasingly difficult underwriting guidelines are causing the same applicants to be counted multiple times as their files are submitted to multiple lenders trying to get approved.  This data is not of great importance to the MBS market.
  3. New home sales will be released at 10AM Eastern.  It would take a significantly stronger than expected reading to mitigate the weakness demonstrated by Durable Goods this morning.  If it is an amazingly high number, we may see some damage to MBS, but I wouldn't expect this report to move markets too much considering the other, more relevant data from this morning.  (edit-numbers just released, sales down 2.2% versus 1.8% consensus.  Not too bad, and I'm not seeing the live trade chart react too negatively.  We're within two ticks of the day's highs in the 5.5% coupon, so don't panic unless we come off another 6 ticks or so--where we started the day.  If that happens, I'll let you know).


This Durable Goods report is very promising news for MBS prices.  As the picture of our recession has become clearer we've seen a sort of "bumpy ride down the mountain" in that some data has spurred hope of skirting the downfall.  The slightly stronger than expected Philly Fed Survey from last week was one such piece of data--an outlier that temporarily lifted the market's hopes.  If it had been followed up by a good Durable Goods number, we could have seen quite the rally in stocks combined with worsening MBS prices. 

But all appears to be well for another day.  The debate about whether or not recession will occur is comical.  It is here.  Nonetheless, it appears that many market bulls would like to prolong the debate.  This has caused the stock market to behave like Jean-Claude Van Damme in one of his late 80's gems: no matter how hard you hit it, or how many reasons you give it to stay down, it keeps coming back up.  (You could have chosen the inflatable clown punching bag analogy just as easily).

Van Damme is make believe whereas the markets actually do have a point where they will be "knocked out."  Stocks almost stayed on the canvas for a full ten count until last week's rally.  If we get more recession-confirming data tomorrow and Friday, it will be another convincing punch-kick combo that helps MBS move into the historical highs.  The stock market's resilience may be reason for pause as we yearn to float into better times, but the final knockout can be just around the corner.  

MBS continue to do well this morning despite a very heavy supply glut caused by one of the Big Boys dumping their newly acquired Jumbo FHA paper to the tune of 1-1.5 billion.  Just in the last 5 minutes, I received word from a Senior Analyst for MBS markets that this flood of paper is being met with reasonable demand from Asian investors and Servicers.  If the buying demand had been weak, then the Big Boy would have lowered prices to entice cherry-picker buyers and mortgage rates could actually have worsened this morning despite the negative economic news.  This is just something to keep in mind.  It's not always about the economic data, but often about "flows."  In other words, supply and demand strictly from an "inventory" perspective. 

Fortunately the flows are good today, in the absence of any further scheduled data releases, headline risk is the devil you know for the rest of the day.  Let's hope more Wall Street Financials that were trading near 200 dollars a share dodge bankruptcy by getting a generous dowry from Uncle Ben.  Tasteless humor yes, and a bit optimistic, but the point is to cross your fingers that the obviously depreciating assets backing the assets backing MBS are the only headline shockers this week, and we'll continue our advances.

Stay glued to the DJIA ticker, as the flow concerns and impactful data are done for the day.  So stock prices and even the 10UST can be a reasonable gauge of MBS demand today barring any MBS specific headlines.  I'll update you if we have a significant down-tick, but until then, it's another day with the water wings on.  So the pool is open and you're welcome to float until further notice.