MBS MID-DAY: 8/29/2011

The S&P Index is currently near 1200, over 20 points higher than Friday's close. As you might expect, that hasn't been good for the bond market. 10yr notes are about 8 bps higher in yield, but have pulled back a bit from their earlier test of 2.30. Volume is super light as well owing to a combination of several overseas markets being closed for Holiday as well as the Irene effect keeping some domestic participants sidelined. Because of that, we're not sure how convicted we'd be about the following, but for now, it looks like both Treasuries and Stocks are on the verge of confirming they're in the midst of consolidation patterns since early August. S&Ps look to be trading a range from just under 1120 to just over 1200 during that time and 10yr notes from 2.06 to 2.35, both generally narrowing. If stocks and bond yields fail to go much higher today, that would accomplish the twofold task of confirming the consolidating patterns as well as potentially suggest extremes for the week heading into NFP. That 2nd one is perhaps a bond bull's "hope," more than a statistically supported likelihood, but for now, it does indeed look like we're at one end of a bounce (bond yields and stock prices to bounce lower, MBS to bounce higher). Speaking of MBS, they're still outperforming treasuries. 4.0's are down 11 ticks on the day at 103-15 and 3.5's are down 9 ticks at 100-16. The fact that the price spread between those two is nearly back to 3 points carries some implication that 3.5's aren't a shoe-in for king coupon just yet.

(Reuters) - Pending sales of existing U.S. homes fell in July from June in the latest sign of weakness in the housing industry, data from a real estate trade group showed on Monday. The National Association of Realtors Pending Home Sales Index, based on contracts signed in July, was down 1.3 percent to 89.7 from 90.9 in June. Economists polled by Reuters ahead of the report were expecting pending home sales to fall 1.3 percent. In a sign of how much the sector has recovered from a year ago, the index was up 14.4 percent from July of 2010. The association's senior economist Lawrence Yun said the latest monthly reading shows sales activity is underperforming but that underlying factors for sales were improving. He cited rising rents and "record" affordability conditions as factors that could point to future growth. "It is now a question of lending standards and consumers having the necessary confidence to enter the market," he said. (Reporting by Jason Lange; Editing by Andrea Ricci)

(Reuters) - U.S. President Barack Obama on Monday will announce he has chosen Princeton University labor economist Alan Krueger to become the top White House economist, two administration officials said. Krueger would succeed Austan Goolsbee as chairman of the White House Council of Economic Advisers. The decision comes as Obama prepares to unveil a jobs package in a speech planned for shortly after the Sept. 5 Labor Day holiday. With U.S. unemployment at a stubbornly high 9.1 percent and amid fears the economy could slide back into recession, Obama is under pressure to show he is doing all he can to bolster growth. Krueger's expertise in labor-market issues is in keeping with the administration's efforts to underscore a focus on jobs. Obama, who returned on Friday from a vacation in Martha's Vineyard in Massachusetts, will announce the pick at 11 a.m. (1500 GMT) at the White House, according to one official, who spoke on condition of anonymity. Krueger served in the Obama administration as a Treasury Department economist but left that job to return to Princeton last fall. The nomination requires Senate confirmation but Krueger has an advantage because he has gone through the confirmation process before for his Treasury job. At Treasury, Krueger was assistant secretary for economic policy and chief economist. He is also a veteran of President Bill Clinton's administration, serving as chief economist for the Department of Labor from August 1994 to August 1995. Krueger holds a Bachelor of Science degree in industrial and labor relations from Cornell University. He earned his PhD in economics at Harvard University. While at Princeton, Krueger was a regular contributor to the Economic Scene column in The New York Times. Krueger has written extensively on unemployment and the effects of education on the labor market. (Editing by Eric Beech)

Several Asian countries as well as London were/are off for Holiday today. Combine that with a relative lack of news and data, the overnight session was pretty quiet. Before this morning's Income and Outlays report 10yr Treasuries had risen exactly to their very highest tick from Friday: 2.23. The slightly stronger than expected report (with an absence of "deflation risk") knocked 10's up past that potential technical support and they've since been weakening (more quickly recently), currently up to 2.2961. MBS are doing a bit better day-over-day, with 3.5's down 12 ticks from 5pm levels at 100-14 and 4.5s down almost half a point to 103-11. Weaker rate sheets are a given, but rest of the week is still up in the air. We were probably destined to see equities rally a bit this morning with Irene growing smaller in the rear-view, and the data exacerbates that bond-market pain. The current levels in 10's and MBS might seem fairly weak, but it's a common sense trendline to test in 10's (connects 8/11 and 8/24). Expect a wider range narrowing in to Friday's NFP in general. Markets are quickly getting to the task of figuring out where the limits of that range will be.

(Reuters) - U.S. consumer spending rebounded strongly in July to post the largest increase in five months on strong demand for motor vehicles, a government report showed on Monday, supporting views the economy was not falling back into recession. The Commerce Department said consumer spending increased 0.8 percent, the largest gain since a matching increase in February, after slipping 0.1 percent in June. Economists polled by Reuters had expected spending, which accounts for about 70 percent of U.S. economic activity, to rise 0.5 percent. When adjusted for inflation, spending rose 0.5 percent last month, the largest gain since a matching increase in December 2009, after being flat in June. Consumer spending braked sharply to a 0.4 percent annual pace in the second quarter after advancing 2.1 percent in the first three months of the year. The overall economy grew at a 1 percent pace in the second quarter after expanding only 0.4 percent in the prior quarter. Spending on durable goods increased 2.0 percent last month, likely reflecting a pick-up in motor vehicle sales as the shortage of autos caused by the supply disruptions from Japan ease. Overall spending in July was lifted by a 0.3 percent rise in income as employers stepped-up hiring. Income rose 0.2 percent in June and economists had expected a 0.3 percent increase last month. The report showed inflation pressures remain elevated. The personal consumption expenditures price (PCE) index rose 0.4 percent after slipping 0.1 percent in June. Compared to July last year, the index was up 2.8 percent, the largest increase since October 2008, after advancing 2.6 percent in June. The core PCE index -- excluding food and energy - rose 0.2 percent for the second straight month. (Reporting by Lucia Mutikani; Editing by Neil Stempleman)