Tuesday 6/17/08 ..... And A Good Morning To You As Well!

By: Matthew Graham •
In A Word:

All of the sudden, those "cool kids" mentioned yesterday are not looking quite as cool.  Indeed, the weather is sunny enough, the slip 'n  slide is set up, and we might actually be able to stay outside and play today regardless of the influence of those inflation hawks.  At this hour, MBS is improved appreciably.  "But wait a minute...  Hasn't every day in the last couple weeks where the MBS has started out strong ended up with it getting beaten right back down again?"  Yes indeed that's the case, but  today (barring any unforeseen headlines) could actually be the day we hold the gains.

The Why:

"You down with PPI?"  Ok, so maybe that's not how the song went, but this month's producer price index is nothing to "get down" over.  Yet again, we have an "as expected" core reading.  The inflation hawks, closely related to chicken littles, have done such a good job at preparing the rest of the farm for the impending falling sky, that when the report comes back that although there are some clouds, the sky is not in fact falling, it is a bit of a pressure-release valve for some pent-up buyers of fixed income who have been holding off.  The economic data today also makes it much less likely that the Fed will bump in the upcoming session.

To Lock or Float?

Finally you can dust off the water wings and get your most flattering aquatic attire out of the closet.  Even if it's only in this relatively cold morning water, we can at least get in the pool.  Lenders won't give up the full benefit of the roughly 10 tick improvement this morning until those gains hold the bar through mid-day.  So even if we see the curve peel off 4 ticks or so, we still probably will not have a reprice until we hit that 5-6 tick range.  In other words, you'll be able to see the sharks coming in plenty of time to get out of the pool.  MBS is soundly outperforming treasuries today, so do not make any decisions based solely on treasuries.  As always, in addition to your normal blog refresh schedule, check back if you see any major market movements or market headlines.

The Numbers:

 

6.0% FNMA OTR IMPROVED by 10/32nds

6.5% FNMA OTR is better by 8/32nds

Here's a Graph of yesterday and this morning's price action.  You can see the appreciable jump that came largely from overnight action, but the PPI and a few other reports have allowed us to hold the gains.


 

The News:

  • PPI
    • Core came in a .2% as expected (the core excludes food and energy)
    • Headline (the whole enchilada) was 1.4%, a bit higher than expectations of 1.0% (well, more than a bit, really)
    • Nonetheless, even if this is not a boon to bonds (ha!), it is at least not a detractor this morning.
  • Housing Starts
    • Who was that who was saying: "the housing collapse is turning around, and next weeks reports are going to show it."  Some "expert" on CNBC?  Sorry pal.  Bears win.
    • Starts fell another 3.3% to an abysmal rate of 975k.
    • Perhaps builders are finally starting to get the picture?
  • Trade Deficit
    • This widened a bit to 176.4 bln
    • Not a major market mover for MBS
  • Industrial Production
    • Who was that who was saying "we are going to be seeing a turn around in production and manufacturing and we can already see it with this week's reports?"  Another expert on CNBC?  Sorry Pal.  Bears win again.
    • This index dropped by.2% versus expectations of a .1% advance.
    • More good news for bonds here, and probably the key teammate to the PPI in helping keep MBS afloat this morning.

Conclusion:

Well, I must say this is a nice little vacation from the carnage.  As with all the other ostensible vacations we've had over the last few days, I would be just as wary now, that despite the data suggesting this vacation will be more sustainable, we could sell back off by the end of the day.  But our chances are better this time around, at least, that we can hold onto these gains.  There is basically no good data on these economic reports for stocks, not to mention some edification (not rock-solid, I'll grant you) for MBS prices moving toward the Fed session.  With no other data set to release today (except State Street Confidence Index which is relatively unimportant and comes out in 3 minutes), keep an eye out for headline risk.  Check back here for updates, and if you are going to join me at the pool, bring a towel.  If that annoying kid (think his middle name is inflation), does "you know what" in the water again, I'll be blowing my magical "lock whistle" thus signifying an end to your fun for the day.