Thursday 6/12/08 ...... Can't Catch A Break

By: Matthew Graham •
In A Word:

Sure we had a bit of a rebound yesterday despite volatility, but check out what is happening this morning:

The Why:

A very nice one/two punch from economic data this morning in the form of worse than expected inflation and significanty stronger than expected retail sales.  We've now broken through key technical support levels and are tap dancing on a tremendous psychological support level for the 6.0% coupon at 100-00.  Ouch!

To Lock or Float?

Most lenders will not have released rates yet, and we should reassess the situation when they do.  If the curve is still showing signs of declining, locking is in order.  The extent to which stocks react to the economic data will also be crucial.  With the stronger than expected retail sales, combined with the big sell-off in stocks yesterday, combined with our break through the 200 day moving average support floor on MBS, it is possible the downward slide can continue.  This suggests locking.  however, if stocks fail to show enough enthusiasm for the numbers as bonds traders have already accounted for, we may recapture some losses which would make floating the way to go.  MBS are favored over treasuries this morning, so at least the tightness of the MBS curve versus the treasury yield curve suggests that traders are more interested in MBS in this big sell off as they represent a higher yield versus treasuries despite their higher risk.

The Numbers:

 

6.0% FNMA OTR is down by 12/32nds to 100-01

5.5 FNMA OTR down by 17/32nds to 97-16.  (less than a month ago we were nearing 102!  That's over a 3 point sell off, meaning what gave you 3 YSP then would be at PAR or worse now!  Ouch!  Consumers usually won't understand that rates can actually be that much worse, so use these MBS price figures to explain how much and how quickly MBS prices have changed).

The News:

  • Retail Sales
    • Average Consensus was for a .5% increase
    • Actual Increase was a significantly higher 1.0%
    • The saving grace is that economists view this retail sales figure as a temporary outlier in what should continue to be a downward trend
    •  in general
  • Jobless Claims
    • Came in at 384k, which is reasonably higher than the expected 365k gain
    • The moving average remains high at 371,500 and
    • The continuing claims remains risorically high, still over 3 mil since April
  • Import and Export Prices
    • Consensus was for a 2.0% increase in import prices
    • Actual rise was 2.3%
    • Even exluding Oil, import prices were up .5% (inflationary)
    • As you know, MBS don't much care for inflation

Conclusion:

To put it as verbosely and eloquently as I can: Today=Bad.  We just got hit hard from the two sectors we most want on our side.  The Prices report adds muscles to teeth to an already fairly scary Inflation Boogie Man.  Now the kids sleeping under trade desks are really pulling the pillows over their head, wanting no part of inflation.  The sales report chips precious enamal away from the teeth of the "weak consumer" concept as it is evidence that consumers keep spending money despite their near record low levels of confidence and sentiment.  No, my friends, this is not good.  Not good....  at all.  Make sure all your priests are praying, all your Jedi channeling the force, and all your witch doctors doing rain dances for a good CPI number tomorrow.  If it coincided with a weak consumer sentiment report, that could help mitigate mych of the damage we have seen (and probably witll continue to see) to the curve today.  If CPI is the same or worse than expected, all hell will break loose as we've lost our footing on the support floor at the 200 day moving average.  The only other branch we might catch on the way down that cliff would be a 100-00 psychological price level on the 6.0% coupon  Let's see how much lenders take away from us this morning.  If it's anything more than .375 YSP, they are heding for further weakness today.  If the signs of that weakness have not come in several hours, today could actually be a floater.  But they probably will come and as opposed to the last several months, our down days will begin to be the rule, and the brief, temporary rebounds should prove to simply be blips on the way down.

All this however is delivered with the caveat that I happen to agree with people who are smarter than me who have said for many months now that the effect that home prices have on consumer's ability to tap equity for purchases must eventually weaken consumer spending to the point that we will see lower readings on retail sales and other consumer dependent data.  Gird up your loins!  MBS are entering a battle of biblical proportions.  See you back here if we have any major movement.  With no further scheduled releases, watch stocks and treasuries for your first sign of a shift, but check back here before making any decisions.  Good luck, and I'll see you on the battlefield.