MBS MID-DAY: Mostly Flat. Defensive Sentiment

The day began with an unfriendly directional drift into higher rates but that move has since corrected as stocks have come off their best levels on embedded technical weakness and another worse than forecast econ report (Consumer Sentiment). The Fannie Mae 4.0 MBS coupon is currently unchanged on the day at 100-25 after opening at 100-16. Loan pricing should be relatively flat today as a result. Profit taking has been seen in benchmark Treasuries heading into the weekend as investors refuse to leave any profits on the table. This illustrates a nervous feeling on the street. With headline news driving trading activity, traders have shortened their tactical timelines to a day over day period. Price volatility is to be expected. Everyone is just trying to stay flat and avoid getting caught in a vortex of volatility.

The Conference Board Leading Economic Index® (LEI) for the U.S. increased 0.8 percent in May to 114.7 (2004 = 100), following a 0.4 percent decline in April, and a 0.7 percent increase in March. (Consensus estimate was for a 0.2% gain). The largest contributions came from the interest rate spread, consumer expectations, and housing permits. Says Ataman Ozyildirim, economist at The Conference Board: “The U.S. LEI rebounded in May and resumed its upward trend with a majority of the components supporting this gain. The Coincident Economic Index, a monthly measure of current economic conditions, continued to increase slowly but steadily. Overall, despite short-term volatility, the composite indexes still point to expanding economic activity in the coming months.” Says Ken Goldstein, economist at The Conference Board: “Modest economic growth is being buffeted by some strong headwinds, including high gas and food prices and a soft housing market. The economy will likely continue to grow through the summer and fall, however it will be choppy.”

After June's preliminary figures for Consumer Sentiment came in slightly weaker than expected, the first move seen in MBS is to the downside. Fannie Mae 4.0 coupons are now down 3/32nds on the day at 100-22. This is slightly counterintuitive as weaker economic data is normally bond-friendly, but one of the internal components of the report speaking to longer term inflation expectations rose from a final reading of 2.9 in May to 3.0 in June's preliminary report. In addition, given the already strong levels in the bond market, it's possible the headline reading of 71.8 versus a 74.0 consensus is not weak enough to spur incremental improvements for MBS and Treasuries. 10yr notes are 3 bps higher on the day at 2.956.

Reuters) - U.S. consumer sentiment worsened more than expected in June on renewed concerns about the outlook for the economy, while worries about inflation eased modestly, a survey released on Friday showed. Consumers remained pessimistic about stagnant incomes and job prospects, and their view of their own finances was largely unchanged at negative levels, the Thomson Reuters/University of Michigan survey showed. The preliminary reading on the overall index on consumer sentiment was 71.8, down from 74.3 the month before. It was below the the median forecast of 74.0 among economists polled by Reuters. Even so, the data gave little evidence a new downturn is underway, with most consumers believing the last recession had not yet ended, the survey found. "The majority of consumers are as convinced today as they were two-and-a-half years ago that their incomes will not increase, and the majority anticipate that the unemployment rate will remain stuck at about its current level for the foreseeable future," survey director Richard Curtin said in a statement. The survey's barometer of current economic conditions fell to 79.6, its lowest level since October 2010, from 81.9 in May. The current personal finances gauge dipped to 82 from 83, while expected personal finances edged up to 107 from 106. The survey's gauge of consumer expectations slipped to 66.8 from 69.5 and below a predicted reading of 68.6. The survey's one-year inflation expectation fell to its lowest since February, to 4.0 percent from 4.1 percent. The survey's five-to-10-year inflation outlook was at 3.0 percent, edging up from 2.9 percent. (Reporting by Leah Schnurr; Editing by Padraic Cassidy)

(Reuters) - The International Monetary Fund cut its forecast for U.S. economic growth on Friday and warned Washington and debt-ridden European countries that they are "playing with fire" unless they take immediate steps to reduce their budget deficits. The IMF, in its regular assessment of global economic prospects, said that bigger threats to growth had emerged since its previous report in April, citing the euro zone debt crisis and signs of overheating in emerging market economies. The global lender forecast that U.S. gross domestic product would grow an anemic 2.5 percent this year and 2.7 percent in 2012. In its forecast just two months ago, it had expected 2.8 percent and 2.9 percent growth, respectively. The outlook elsewhere was mixed. The IMF said it was slightly more optimistic about the euro area's growth prospects this year, but a lack of political leadership in dealing with that crisis and the budget showdown in the United States could create major financial volatility in coming months. "You cannot afford to have a world economy where these important decisions are postponed because you're really playing with fire," said Jose Vinals, director of the IMF's monetary and capital markets department. "We have now entered very clearly into a new phase of the (global) crisis, which is, I would say, the political phase of the crisis," he said in an interview in Sao Paulo, where the forecast was published.

Relative to Treasuries, MBS had a bad day yesterday, making only minimal gains versus a healthy day of Flight-To-Safety for benchmarks. But the tables have turned this morning into a slight downtrade motivated by overnight improvements to Greece's outlook. Fannie Mae 4.0 coupons are down 3/32nds so far this morning to 100-22 while 10yr Treasuries are down 12/32nds, increasing the yield by just over 4.5 bps to 2.9708. The 100-22 level is roughly on the lower end of yesterday's MBS trading range. Considerations surrounding the Eurozone situation and the quarterly options/futures expirations are the 2 most likely market movers until Consumer Sentiment hits at 9:55am. Volume is high versus recent averages, but not nearly as high as yesterday's immense overnight volume.