MBS MID-DAY: Weak Economic Data Offsets European Influences

MBS Pricing Snapshot

It would have taken a rather concerted effort of rather awful data for bond markets to make a full recovery from earlier weakness as well as a generally negative trend that looked set to continue from the overnight session. And a concerted effort is what we got.

Apart from the weaker-than-expected Jobless Claims earlier this morning, we now have a fairly big miss on Existing Home Sales and more importantly another relatively large move to the downside for the Philly Fed Index. The latter is of particular importance this morning as the Employment component of the report turned negative, and in a big way, further adding to arguments that seasonal factors have been distorting employment data.

But despite the many good reasons for a more pronounced bond market rally, both Treasuries and MBS are merely flirting with unchanged levels day-over-day, as opposed to stomping right through them into the green. The whole kingdom of risk is moving in unison after the data as stocks, bonds, European bonds, European stocks, The Euro, and MBS all bounce together.

We're not sure who's following who at the present moment, but here are a few considerations. There's scheduled Fed "twist" buying going on at the moment, set to conclude at 11:00am. It's been fairly common to see a measured dose of volatility and volume after those. European bond markets, which have definitely been dragging domestic yields up, also close at 11am.

Those potentially positive factors are offset by the potential ongoing challenge of a simple trend of weakness that bond markets seem to be combating at the moment. We'll know more about how that pans out after 11am, but for now, we're at least faring better than we were earlier this AM. 10yr yields are unch'd at 1.4942 and Fannie 3.0's are 2 ticks into the green at 103-21.

* 4.37 mln annual pace vs 4.63 mln consensus
* Slowest in 8 Months
* May revised from 4.55 mln to 4.62 mln
* -5.4 percent vs revised 0.0 percent change in May

Limited supplies of housing inventory held back existing-home sales in May, but sales maintained a strong lead over year-ago levels and home prices are on a sustained uptrend in all regions, according to the National Association of Realtors®.

Total existing-home sales1, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, declined 1.5 percent to a seasonally adjusted annual rate of 4.55 million in May from 4.62 million in April, but are 9.6 percent above the 4.15 million-unit pace in May 2011.

Lawrence Yun, NAR chief economist, said inventory shortages in certain areas have been building all year. "The slight pullback in monthly home sales is more likely due to supply constraints rather than softening demand. The normal seasonal upturn in inventory did not occur this spring," he said. "Even with the monthly decline, home sales have moved markedly higher with 11 consecutive months of gains over the same month a year earlier."

* Headline -12.9 vs -8.0 Consensus
* 6-month outlook roughly unchanged 19.3 vs 19.5
* New Orders -6.9 after falling 18.8 last month
* Employment component -8.4 vs +1.8 in June

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased from a reading of −16.6 in June to −12.9. This marks the third consecutive negative reading for the index (see Chart). Nearly 32 percent of the firms reported declines in activity this month, exceeding the 19 percent that reported increases. Indexes for new orders and shipments remained negative but increased 12 and 8 points, respectively.

Labor market conditions at the reporting firms deteriorated this month. The current employment index decreased 10 points, to −8.4, its second negative reading in three months. The percent of firms reporting decreases in employment (18 percent) exceeded the percent reporting increases (10 percent). Firms also indicated fewer hours worked this month: The average workweek index increased 2 points but posted its fourth consecutive negative reading.

30-year fixed-rate mortgage (FRM) averaged 3.53 percent with an average 0.7 point for the week ending July 19, 2012, down from last week when it averaged 3.56 percent. Last year at this time, the 30-year FRM averaged 4.52 percent.

15-year FRM this week averaged 2.83 percent with an average 0.6 point, down from last week when it averaged 2.86 percent. A year ago at this time, the 15-year FRM averaged 3.66 percent.

5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 2.69 percent this week, with an average 0.6 point, down from last week when it averaged 2.74 percent. A year ago, the 5-year ARM averaged 3.27 percent.

1-year Treasury-indexed ARM averaged 2.69 percent this week with an average 0.4 point, the same as last week. At this time last year, the 1-year ARM averaged 2.97 percent.

This morning's Jobless Claims report actually did garner a noticeably response in terms of volume, but it was more to do with markets latching on to the first eligible event that might stem the tide of increased weakness late in the overnight session. Said weakness arrived on the heels of overnight news that German Parliament supported the Spanish bailout and that the bailout agreement itself is said to allow for the EFSF to buy Spanish bonds. France had a solid debt auction and Spain--despite having weak auctions--still managed to reach expected levels of funding.

All of the above helped kick off the "risk-on" trade overnight. US Treasuries followed German Bunds closely into the domestic open as 10yr yields flirt with a break into the 1.52's.

MBS walked in the door just slightly weaker this morning and as-expected, are outperforming Treasuries into the selling, down just 2 ticks in Fannie 3.0s to 103-17. Fannie 3.5's are down just 1 tick at 105-29, but the current levels of resilience are likely predicated, at least in part, by 10yr yields holding something of a supportive ceiling at 1.521. That said, the slightly longer term picture continues to look like we're seeing a potential bounce to higher yields and lower prices. As we noted yesterday, this would become a bigger concern if 10's broke above 1.56.

Next up for domestic markets, we have Existing Home Sales at 10am, joined by bigger potential market mover in the form of Philly Fed, which is seen 'improving' to -8.0 after last month's -16.6 flop.

In the week ending July 7, the advance figure for seasonally adjusted initial claims was 350,000, a decrease of 26,000 from the previous week's revised figure of 376,000. The 4-week moving average was 376,500, a decrease of 9,750 from the previous week's revised average of 386,250.

The advance seasonally adjusted insured unemployment rate was 2.6 percent for the week ending June 30, unchanged from the prior week's unrevised rate.

The advance number for seasonally adjusted insured unemployment during the week ending June 30 was 3,304,000, a decrease of 14,000 from the preceding week's revised level of 3,318,000. The 4-week moving average was 3,308,500, an increase of 1,250 from the preceding week's revised average of 3,307,250.