MBS MID-DAY: 3/16/2012

While there is no definitive face-melting rally underway, MBS and Treasuries have been able to stave off a break past their weakest levels of the morning. We wish we could be sure that this bodes well for the same levels holding as support for the rest of the day, but such volatility is a way of life in the short term.

Fannie 3.5's are currently significantly calmer than 10yr TSYs, having not even traded below yesterday morning's weakest levels at 101-27, hitting lows of 101-29 instead, and currently up to 102-05.

10yr yields topped out at just over 3.36 earlier this morning and made their best corrective swoop lower following tame Consumer Sentiment, though not necessarily because of it. The best thing to plan on is further volatility. We see a glimmer of hope for support at today's weakest levels, but wouldn't rule out a wider range, allowing for instance, 2.42 on the high side for 10yr Treasuries and 2.25 on the "aggressive rally" side.

Those are the extremes, but we should remember they're possible. The pops in volume combined with the price action seem to suggest the weakest levels are in, and that we could trade a narrowing or improving range from the foundation of high volume support around 2.35. Said foundation corresponds roughly to 102-00 in terms of Fannie 3.5, at least for now.

But above all else, we'd say to view any improvements in prices as a pleasant surprise, and to stay guarded against the opposite. Don't let the last hour of decent price action lull you into a false sense of security. Make sure your automatic alert settings are to your liking and send us an email to support@mortgagenewsdaily.com if you have any issues getting them set-up.

(Reuters) - Consumer sentiment dipped in early March as rising gasoline prices pushed Americans' inflation expectations for the next year higher, a survey released on Friday showed.

The Thomson Reuters/University of Michigan's preliminary reading on the overall index on consumer sentiment slipped to 74.3 from 75.3 in February, shy of economists' forecasts for a gain to 76.0.

Even so, consumers did not expect the run-up in gasoline prices to last very long and anticipated further gains in employment this year.

"Overall, the data indicate that $4 gasoline has lost its shock value, although the drain on discretionary income will still affect spending, mostly among lower income households," survey director Richard Curtin said in a statement.

Overnight volume was fairly light until about 7am. Volume and volatility have been steadily increasing since then, and not in a friendly way for bond markets. The "real money" accounts (un-levered folks like insurance funds, banks, pension funds, etc...) have been the main source of support while levered accounts ("Fast Money") would be content to cover shorts closer to the epic 2.42 target.

But real money accounts can only do so much heavy lifting before being overwhelmed by more tactical concerns. There's a chance we will see support come in around current levels, but there is perhaps an equal chance that we'll need to see the more "cleansing" levels around 2.40% in 10yr yields before a more concerted rally would ensue.

Whatever the case, 10yr yields are holding up around 2.35% fairly supportively at the moment, and have pushed just now to mid 2.34's. Fannie 3.5 MBS are trying hard to hang on to 101-30 technical support, currently down 11 ticks on the day at 101-31.

These checks on trading levels, we're sad to say, are only as good as the time stamp on this alert. The volatility we expected after Wednesday's breakout has unfortunately been in full supply and we can't put much faith behind movements that might look like the beginnings of corrective bounces back if they're not even half the magnitude of the morning's previous gyrations.

Consumer Sentiment is up in about 5 minutes, and is the last report of the week. If it's ugly enough, it could help rates hold their ground, but the most potent motivators of trading direction remain very much disconnected from economic data at the moment, so there are no guarantees.

*Industrial Production unchanged at +0.4
*Capacity Utilization 78.7 vs 78.8 consensus

Industrial production was unchanged in February after having risen 0.4 percent in January. Previously, industrial production was reported to have been unchanged in January. Manufacturing output moved up 0.3 percent in February. Within manufacturing, the index for motor vehicles and parts fell 1.1 percent after jumping 8.6 percent in January, but the index for manufacturing excluding motor vehicles and parts increased 0.4 percent in February. Production at mines fell 1.2 percent, while the output of utilities was unchanged. At 96.2 percent of its 2007 average, total industrial production for February was 4.0 percent above its year-earlier level. Capacity utilization for total industry edged down to 78.7 percent, a rate 1.2 percentage points above its level from a year earlier but 1.6 percentage points below its long-run (1972--2011) average.

*CPI +0.4, as expected.
*Core CPI (excludes food/energy) up 0.1 vs +0.2 consensus
*Annual CPI +2.9 and +2.2 at Core, both as expected
*Gas prices = 80 pct of February Rise
The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.4 percent in February on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 2.9 percent before seasonal adjustment.

The gasoline index rose sharply in February, accounting for over 80 percent of the change in the all items index. The gasoline increase led to a 3.2 percent rise in the energy index despite a decline in the index for natural gas. The food index was unchanged in February, with the food at home index unchanged for the second month in a row as major grocery store food indexes were mixed.

The index for all items less food and energy rose 0.1 percent in February after increasing 0.2 percent in January. Indexes for shelter, new vehicles, medical care, and household furnishings and operations all advanced, while indexes for apparel, recreation, used cars and trucks, and tobacco all declined.

The all items index has risen 2.9 percent over the last 12 months, the same figure as last month. The index for all items less food and energy was up 2.2 percent, a slight decline from last month's 2.3 percent figure, while the 12-month change in the food index fell to 3.9 percent in February, its lowest level since last June. In contrast, the 12-month change in the energy index was 7.0 percent in February compared to 6.1 percent in January.