CPI Tame, Housing Lame, MBS Same

MBS are just a few ticks off being unchanged for the day after a nice rally this morning on the inflation data and weak housing numbers. 

The CPI (consumer price index, a key measure of inflation), came in bang on with expectations at .3% and .2% excluding food and energy.  Even though inflation remains historically high, the predictions made by analysts are already "baked into the cake," meaning that if 30+ financial analysts average research shows the CPI should be .3%, then the markets more or less adjust for that being the case as soon as the analysts are polled.  So this reading on CPI, though historically high, was good news for the bond markets, and MBS did have a nice rally following.

In other ostensibly good news for the bond market, Housing Starts continue to be abysmally low (2x worse than forecast, 17 year low).  Granted that report is usually not of the greatest impact to the bond markets, but if it differs from expectations that greatly, it can move bonds a bit.  The problem is the other data.

First of all, Chase earnings were on par with expectations.  I suppose in this economy, if you are just as crappy as people think you are, it actually makes you a little less crappy!  (the morning humor...  I'm working on my shtick).  So their stock is up,  along with other big players like Intel, Coke, and Wells (who also reported earnings a little less crappy than expected).

Adding fuel to that fire is a slightly stronger than expected Industrial production report coming in .4% higher than the consensus of -0.1%.  

So despite some bond friendly data (the CPI is 40,000 times more important to MBS than corporate earnings), the Dow had rallied a bit too high for MBS to hold their improvements.  The DJIA was up around 140 when I began writing and is now off that a bit.  As it has declined, MBS improved a tick or two.  So it would seem that stocks and MBS are playing a bit of tug-o-war. 

If you have some time before your closings, risks favor floating right now.  MBS dropped precipitously in the last two days, and the historical trading ranges are showing a bit of resistance to the price curve moving lower.  Of course if it does, that would be bad news.  So as always, if you can't afford to lose any ground from current pricing, locking now takes that risk out of the market.  But if you have some time to wait, we're going to get our MBS prices on the 5.5% coupon back up around 101-00 in less than 2 weeks.  As always, I clarify by saying this is my "gut feeling."  The numbers back it up as well in my view, but others can interpret numbers in different ways.  In a vacuum of negative MBS headlines (it's been eerily quiet), stocks, bonds, and MBS all have a reasonably predictable interplay.  So if you think stocks are headed up or inflation could get out of control, you are probably wanting to lock sooner than later.  If, on the other hand, you are a market bear, thinking stocks will surely plummet, inflation is under control, and MBS quality perception is returning to the market, you are a floater.  Evaluate the data and draw your own conclusions.

Again, the 10 year note is a valid comparison to MBS today (or at least it has been so far this morning).  If the yield begins to rise more than a few ticks, that is a lock signal.