MBS Catch Bid After Weak Econ Data. Buyers Back to Soak Up Supply Surplus

Econ data surprised to the downside, stocks are selling through support levels, Treasury longs are reaffirming a "buy on the dips" bias, and rate sheet influential mortgage-backs are finally catching a bid. Phew. After four straight days of selling, buyers have returned to the MBS market to soak up the surplus of inventory that was recently added to dealer books.   

The October FNCL 4.0 is +0-11 at 102-12 and the FNCL 4.5 is +0-09 at 104 the rock.  Yield spreads were tighter out the gate but have since widened vs. the rapidly flattening yield curve. If lenders take down pricing indications right now, rebate should improve. If your lender published pricing early in the day,you are due a reprice for the better.

Motivational considerations from a fundamental perspective....

08:30 19Aug10 RTRS-US JOBLESS CLAIMS ROSE TO 500,000 AUG 14 WEEK (CONSENSUS 476,000) FROM 488,000 PRIOR WEEK (PREVIOUS 484,000)
08:30 19Aug10 RTRS-US JOBLESS CLAIMS 4-WK AVG ROSE TO 482,500 AUG 14 WEEK FROM 474,500 PRIOR WEEK (PREVIOUS 473,500)
08:30 19Aug10 RTRS-US CONTINUED CLAIMS FELL TO 4.478 MLN (CON. 4.500 MLN) AUG 7 WEEK FROM 4.491 MLN PRIOR (PREV 4.452 MLN)
08:30 19Aug10 RTRS-US INSURED UNEMPLOYMENT RATE UNCHANGED AT 3.5 PCT IN AUG 7 WEEK (PREV 3.5 PCT)
08:30 19Aug10 RTRS-US JOBLESS CLAIMS HIGHEST SINCE NOV 14, 2009 WEEK (509,000); FOUR-WEEK AVERAGE HIGHEST SINCE DEC 5, 2009 WEEK (486,000)
08:30 19Aug10 RTRS-TABLE-U.S. jobless claims rose in latest week

Plain and Simple: This WAY WORSE THAN EXPECTED claims print comes during the survey week for the official Employment Situation Report. I'm not sure if the large uptick in claims was a factor of Census layoffs...but this number should force some economists to mark down their NFP forecast.

Rates rallied modestly after initial claims but were far more inspired by the sizable decline of the Philly Fed Index.

10:00 19Aug10 RTRS-PHILADELPHIA FED BUSINESS CONDITIONS AUG -7.7 VS JULY 5.1 VS. CONSENSUS +7.0
10:00 19Aug10 RTRS-PHILADELPHIA FED NEW ORDERS INDEX AUG -7.1 VS JULY -4.3
10:00 19Aug10 RTRS-PHILADELPHIA FED PRICES PAID INDEX AUG 11.8 VS JULY 13.1
10:00 19Aug10 RTRS-PHILADELPHIA FED EMPLOYMENT INDEX AUG -2.7 VS JULY 4.0
10:00 19Aug10 RTRS-PHILADELPHIA FED SIX-MONTH BUSINESS CONDITIONS AUG 19.6 VS JULY 25.0
10:00 19Aug10 RTRS-PHILADELPHIA FED SIX-MONTH CAPITAL EXPENDITURES OUTLOOK AUG 12.3 VS JULY 8.6
10:01 19Aug10 RTRS-REUTERS FORECAST FOR AUGUST PHILADELPHIA FED BUSINESS CONDITIONS INDEX WAS 7.0
10:02 19Aug10 RTRS-PHILADELPHIA FED INDEX FOR AUGUST AT LOWEST SINCE JULY 2009

The reaction is obvious....6bps better at 10AM.

S&P futures transformed back into a falling knife. Volume picked up as 1085 support broke down. The range base is still intact though...

I'm skeptical of this rally for two reasons: volatility is on the rise and 10yr swap spreads are holding near one month wides. This is a sign that traders may look to "fade" this overbought rally. I could be overthinking it though...

If you recover lost rebate this morning, I would view it as opportunity to lock in short term floaters.