Now the News picks Up! (should be a volatile day)

By: Matthew Graham •

With the stock market in a fairly good mood, numerous reports suggesting we may be pulling up from our economic nose dive, numerous reports on the way, and the ten year treasury rising faster than MBS in recent weeks, we have the makings for a very action-packed day.

The 5.5% coupons is currently at 100-12, which is dead even, day over day. 

Here's the news that we have so far:

  1. MBS Application Activity rose this week.  Slightly lower rates brought the REFI index up to 2273.8 a 19.3% increase from last weeks 1905.2 which was the lowest of the year.  The purchase index rose 12.1% to 381.3.  Refi's gained market share versus purchases no with 47.1% of transactions versus 45.7%.  ARM's gained market share against fixeds rising to 6.8% from 5.9.  This will not be a major impacter on MBS pricing.
  2.  Non-Farm Productivity came in at a 2.2% increase up from 1.9% in the first quarter.  Unit Labor costs also rose by 2.2% which was less than analysts estimates from 2.3 to 2.6 depending on who you asked.  The component "hours of all persons" fell at 1.8%, the third straight decline and the lowest reading since 2003.  If history is our guide, this metric exhibited similar trends leading into and during the 2001 recession.  The fact that labor costs were less than expected is good news for inflation, especially considering the productivity that employers are receiving for those costs rose more than expected.  Although lower inflation is good news for the bond market, the productivity numbers are good news for the stock market.  So this report is more or less of a wash today, and as such is not effecting MBS.
  3. Due at 10AM eastern is the pending home sales index. 
  4. At 1030, we will get data from the EIA on oil inventories.  More surprising drops in oil inventory can push prices yet higher into record territory and spark increased wariness of inflation, which will hurt MBS, though not as much as treasuries
  5. At 1pm, we have a 10 year treasury auction.  If demand for this is weaker than expected, MBS will likely suffer as well.  If demand is high, rates will improve for both treasuries and MBS.  This report has had the tendency to be the "sleeper" among market movers recently.  It's not widely commented on or thought to affect MBS, but the last several auctions that have deviated from expectations have drastically affected MBS, so be watching 10 year rates at 1pm-130pm.  If yield start to rise, a reprice for the worse is a potential.
  6. At 3pm, consumer Credit will be released.  This is akin to a bowl of porridge.  We don't want it to be too hot or too cold.  Actually, if we are just concerned with MBS, then we LIKE bad porridge.  A "just right" reading would benefit stocks.  A "too low" reading is bad news for the immediate future of stocks because the markets need a decent level of consumers borrowing money in order to maintain economic stimulation.  If the reading is too high, it's a sign that consumer spending will be decreasing in the intermediate future, which would also hurt stocks and probably help MBS.  All in all though, this is not a closely watched indicator of MBS trends.
  7. A report on the payoff speeds of mortgages was released last night showing that consumers are selling and refinancing at a decreased percentage of overall volume.  This is good news for MBS as the longer consumers hold on to mortgage loans, the better the return for investors.  Thus the demand for higher rates wanes.  This should add to the resiliency displayed by MBS yesterday and indeed MBS have tightened the gap to treasuries by another eighth this morning.

Stay tuned for the market "buzz" today as we've been pretty slow so far this week.  Volume should pick up today and depending on headlines and upcoming economic releases we could see a decent amount of movement.  Since I started typing, we've gained 2/32nds on the 5.5% coupon.  Not much of the data left is very impactful for MBS, so keep your eye on the stock market as a rally will hurt MBS.   And though there is a decent gap between MBS and treasuries today, they stills should move in relative concert.  When this occurs, the reason I bring it up is so that you can watch treasuries for an indication of rate direction.  Since treasury prices are public domain knowledge, this prevents you from having to refresh the blog page for rate alerts.  HOWEVER, if you think the 10 year yield rising indicates a price worsening, DO BE SURE to check back here before locking as I will notify you if treasuries and MBS are for some reason, moving in opposite directions, which they sometimes do.

I'll be floating with the Dow at these levels.  I think it must come down soon and it's just a matter of time until we get the data to stimulate that.  Good Morning and Good Luck!