MBS MID-DAY: Sideways So Far

The FNCL 4.5 MBS coupon has bounced around a 4-tick range between 103-05 and 103-09 all morning, making market watching somewhat boring. Rate sheets are mixed on first run. Lenders who did not reprice for the better yesterday afternoon passed along a few extra bps this morning. Desks who decided to recall and reprice for the better yesterday are about unchanged today. If you're looking for improved rebate, we've set a 103-14 target on reprices for the better. If you're defensively monitoring the market, reprices for the worse become more likely as FNCL 4.5s trade below 103-00.

Business Inventories in March rose at a rate of 1.0% after rising at a 0.7% in February. Economists had been forecasting a +0.8% increase. Manufacturers and Wholesalers, the two largest components of the report, led a 2.2% charge higher in Sales, while Autos declined for the first time in several months. This brings March's Inventory to Sales Ratio, which is a measure of how long it would take to deplete inventories given the current pace of sales, to a record low of 1.23 months vs 1.24 months in February. Margin Squeeze?

* PLOSSER - ANY FED WITHDRAWAL OF ACCOMMODATION MAY NOT GO FORWARD ON CONTINUOUS BASIS, MAY INCLUDE PAUSES * PLOSSER - FED IS ACTIVELY DISCUSSING HOW REMOVAL OF ACCOMMODATION MIGHT WORK, IDEAS VARY * PLOSSER - FED IS UNSURE WHAT IMPACT BALANCE SHEET MANAGEMENT STEPS WILL HAVE ON MARKETS * PLOSSER - OBJECTIVE OUGHT TO BE TO SHRINK BALANCE SHEET SO FED CAN OPERATE IN CORRIDOR SYSTEM WITH FED RATE AS TARGET * PLOSSER - FED HAS MADE CLEAR THERE'S NO QE3 ON TABLE UNLESS SOMETHING DRAMATIC HAPPENS * PLOSSER - END OF QE2 BUILT INTO MARKET, DON'T SEE ANY DISRUPTIVE EFFECTS * PLOSSER - ECONOMY DOESN'T HAVE TO BE REALLY ROBUST TO GET INFLATION * PLOSSER - WHAT FED DOES AFTER JUNE 30 DEPENDS ON INFLATION AND INFLATION EXPECTATIONS * PLOSSER - IF PROJECTIONS HOLD, WOULDN'T BE SURPRISED IF FED HAS TO TAKE SOME ACTION BEFORE END OF YEAR * PLOSSER - DON'T THINK CURRENT FED POLICY IS FUELING ASSET BUBBLES, BUT MUST WATCH FOR DISTORTIONS * PLOSSER - WOULD LIKE TO GET AWAY FROM ZERO BOUND, EVEN IF JUST BY A LITTLE BIT * PLOSSER - DO NOT THINK U.S. IS GOING TO DEFAULT, U.S. STILL WORLD'S DEEPEST, MOST LIQUID MARKET FOR GOVT SECURITIES * PLOSSER SAYS SEES NO INCENTIVE FOR LARGE HOLDERS OF U.S. SECURITIES TO DUMP THEM

To put the headline in context, please not that the difference between the strongest and weakest levels of the morning for MBS is a scant 3 ticks from 103-09 to 103-06. 10yr notes have risen in yield slightly as well from 3.18 to 3.19. However, unless we head significantly higher, we're basically biding our time until this afternoon's auction, hoping not to move too much in either direction, but wary of a potential concession being built in. Next data on tap is Business Inventories at 10am.

(Reuters) - President Barack Obama urged businesses to "step up" and hire workers, pressing banks and other corporations to do more to help an economy that he said would take "several years" to recover fully. In a town-hall style meeting conducted by CBS News on Wednesday, Obama said the weak housing market and high gasoline prices were the biggest "headwinds" dragging on the economy. "We've got a lot more work to do to get businesses to invest and to hire," he told the audience in remarks broadcast on Thursday. "It's going to take us several years for us to get back where we need to be." The strength of the U.S. economy is likely to be the main factor that determines whether Obama will succeed in holding on to the White House next year. He said businesses and banks that reaped the rewards of extraordinary measures to pull the country out of a deep recession had a responsibility now to invest hordes of cash into U.S. jobs. "It is time for companies to step up," Obama said. "American taxpayers contributed to that process of stabilizing the economy. Companies have benefited from that, and they're making a lot of money, and now's the time for them to start betting on American workers and American products."

* FED'S PLOSSER - FED MUST REMOVE EASY MONEY POLICY IN NOT-TOO-DISTANT FUTURE IF ECONOMIC RECOVERY STAYS ON TRACK * PLOSSER - INFLATION RISKS ARE TILTED TO THE UPSIDE, FED MUST HAVE A PLAN TO WITHDRAW ACCOMMODATIVE POLICIES * PLOSSER - OIL PRICE RISES WILL LEVEL OFF, CURRENT HIGH INFLATION MEASURES WILL REVERSE * PLOSSER - CONCERNED MEDIUM-TERM INFLATION EXPECTATIONS VOLATILE, SUGGESTS DOUBT OVER FED PRICE STABILITY COMMITMENT * PLOSSER - EXPECT MODEST DECLINES IN JOBLESS RATE TO ABOUT 8.5 PCT BY YEAR END, RANGE OF 7 PCT TO 7.5 PCT BY END 2012 * PLOSSER - EXPECT MODEST GROWTH OF AROUND 3 PCT TO 3.5 PCT THIS YEAR AND NEXT * PLOSSER - HOUSING TO REMAIN US ECONOMIC WEAK SPOT, BUT SOME REGIONS SHOWING SIGNS OF LIFE * PLOSSER - GROWTH IN MANUFACTURING A SIGN OF OPTIMISM * PLOSSER - FOR CONSUMER SPENDING TO PICK UP, JOB MARKET NEEDS TO STRENGTHEN

*US JOBLESS CLAIMS FELL TO 434,000 MAY 7 WEEK (CONSENSUS 430,000) FROM 478,000 PRIOR WEEK (PREVIOUS 474,000) *LABOR OFFICIAL SAYS DROP IN CLAIMS PARTLY REFLECTS PRIOR WEEK'S HIGHER THAN EXPECTED RISE DUE TO FACTORS NOT ANTICIPATED BY SEASONAL ADJUSTMENT *LABOR OFFICIAL SAYS LARGE INCREASE IN ALABAMA CLAIMS DUE TO STORMS, TORNADOES; NOT ENOUGH TO ADJUST NATIONAL NUMBERS *US JOBLESS CLAIMS 4-WK AVG ROSE TO 436,750 MAY 7 WEEK FROM 432,250 PRIOR WEEK (PREVIOUS 431,250) *US CONTINUED CLAIMS ROSE TO 3.756 MLN (CON. 3.700 MLN) APRIL 30 WEEK FROM 3.751 MLN PRIOR WEEK (PREV 3.733 MLN) *US INSURED UNEMPLOYMENT RATE UNCHANGED AT 3.0 PCT APRIL 30 WEEK FROM PRIOR WEEK (PREV 3.0 PCT)

*US APRIL RETAIL SALES +0.5 PCT (CONSENSUS +0.6 PCT) VS MARCH +0.9 PCT (PREV +0.4 PCT) *US APRIL RETAIL SALES EX-AUTOS +0.6 PCT (CONS +0.6 PCT) VS MARCH +1.2 PCT (PREV +0.8 PCT) *US APRIL RETAIL SALES EX-GASOLINE +0.2 PCT, SMALLEST RISE SINCE JULY 2010, VS MARCH +0.5 PCT *US APRIL RETAIL SALES EX-AUTOS/GAS/BUILDING MATERIALS +0.2 PCT VS MARCH +0.6 PCT *US APRIL GASOLINE SALES +2.7 PCT VS MARCH +4.1 PCT *US APRIL CARS/PARTS SALES +0.2 PCT VS MARCH -0.7 PCT *US APRIL RETAIL SALES RISE SMALLEST SINCE JULY 2010 (+0.3 PCT)

You might notice today on the MBS dashboard what seems to be excessive price weakness in the 10-year Treasury note. This is not the case. What you are seeing is the day over day price change between the old "on the run" 10-year Treasury note vs. the new "on the run" 10-year Treasury note, which was just issued yesterday during the 10-year note auction. The reason for the large price discrepancy has to do with the coupon rate that was assigned to the new 10-year note yesterday. The previous "on the run" note had a 3.625% coupon rate while the new note has a 3.125% coupon. The new 3.125% coupon rate resets par pricing on the 10-yr note at 3.125% whereas the previous OTR 10-year note had par pricing (100-00) set at 3.625%. Remember, what you are seeing today is the price change between the old 3.625% coupon vs. the new 3.125% coupon.

*U.S. APRIL PPI +0.8 PCT (CONSENSUS +0.6 PCT), VS MARCH +0.7 PCT *U.S. APRIL PPI EXFOOD/ENERGY +0.3 PCT (CONS +0.2 PCT) VS MARCH +0.3 PCT *U.S. APRIL YEAR-OVER-YEAR PPI +6.8 PCT (CONS +6.5 PCT), CORE +2.1 PCT (CONS +2.1 PCT) *U.S. APRIL PPI INTERMEDIATE GOODS +1.3 PCT, EXFOOD/ENERGY +1.1 PCT *U.S. APRIL PPI CRUDE GOODS +4.0 PCT, EXFOOD/ENERGY +2.6 PCT *U.S. APRIL PPI ENERGY +2.5 PCT, GASOLINE +3.6 PCT, HEATING OIL +3.9 PCT *US APRIL PPI FOOD +0.3, TOBACCO UNCH, PASSENGER CARS +0.5 PCT, LIGHT TRUCKS +0.6 PCT *US APRIL YEAR-OVER-YEAR PPI LARGEST RISE SINCE SEPT 2008 (+8.8 PCT), YEAR-OVER-YEAR CORE PPI LARGEST RISE SINCE AUG 2009 (+2.3 PCT) *US APRIL PPI INTERMEDIATE GOODS EXFOOD/ENERGY LARGEST RISE SINCE JULY 2008 (+2.0 PCT)

Interest rates continue to wait in limbo as risk markets weigh the economic impact of expensive food & energy costs in an environment that offers little wage growth (cost push inflation requires wage growth or you end up with one big margin squeeze and stagflation!). This sentiment is reflected via rapidly falling commodities prices. Light crude oil prices fell back into double-digit territory on Wednesday and sold off an another 2.35% overnight to $95.88 (about $8 less than 24 hours ago). Meanwhile gold prices are down another 0.97% to $1,486.90. Struggling commodities prices are weighing on equities this morning following a broad sell-off Wednesday that led stocks lower by more than 1%. S&P 500 futures are -7.00 points 1,331.75 and Dow futures are 52 points off at 12,539. The two indexes closed 15.1 points and 130.3 points lower on Wednesday, respectively (-1.11% and -1.02%). "The market's appetite for risk has waned considerably over the past week or so and this morning is no exception," said economists at BMO Capital Markets, who noted the sell-off continued after China, in another effort to halt inflation, raised reserve requirements by another 50 basis points. The sell-off in stocks is providing support to fixed income assets. After a strong auction yesterday, the 10-year Treasury note yield shot like a rocket from 3.215% to 3.153, helping lead the June delivery FNCL 4.0 to almost a full-recovery from the monthly roll. This allowed lenders to reprice for the better. The new 3.125% coupon bearing 10yr note is currently yielding 3.175% and the FNCL 4.0 is +2/32 at 100-06. Investors are awaiting key retail sales data, weekly unemployment claims, Fed Speak and an afternoon 30-year bond auction.