MBS MID-DAY: Prolonged Weakness Continues, Arrives At Crossroads

MBS Pricing Snapshot

* Inventories -0.2 pct vs +0.3 pct consensus
* Sales -1.4 pct vs +0.1 pct consensus

The U.S. Census Bureau announced today that June 2012 sales of merchant wholesalers, except manufacturers’ sales branches and offices, after adjustment for seasonal variations and trading-day differences but not for price changes, were $402.9 billion, down 1.4 percent (+/-0.5) from the revised May level, but were up 3.1 percent (+/-0.9%) from the June 2011 level. The May preliminary estimate was revised downward $1.1 billion or 0.3 percent. June sales of durable goods were down 0.7 percent (+/-0.9%)* from last month, but were up 5.7 percent (+/-1.1%) from a year ago. Sales of machinery, equipment, and supplies were down 2.8 percent from last month. Sales of nondurable goods were down 1.9 percent (+/-0.7%) from May, but were up 0.9 percent (+/-1.1%)* from last June. Sales of petroleum and petroleum products were down 5.3 percent from last month and sales of farm product raw materials were down 2.8 percent.

Total inventories of merchant wholesalers, except manufacturers’ sales branches and offices, after adjustment for seasonal variations but not for price changes, were $481.9 billion at the end of June, down 0.2 percent (+/-0.4%)* from the revised May level, but were up 5.3 percent (+/- 1.1%) from the June 2011 level. The May preliminary estimate was revised downward $1.4 billion or 0.3 percent. June inventories of durable goods were up 0.2 percent (+/-0.4%)* from last month and were up 9.1 percent (+/-1.1%) from a year ago. Inventories of hardware, and plumbing and heating equipment and supplies were up 1.8 percent from last month. Inventories of nondurable goods were down 0.8 percent (+/-0.5%) from May, but were up 0.2 percent (+/-1.8%)* from last June. Inventories of petroleum and petroleum products were down 8.7 percent from last month and inventories of beer, wine, and distilled alcoholic beverages were down 2.3 percent.

The June inventories/sales ratio for merchant wholesalers, except manufacturers’ sales branches and offices, based on seasonally adjusted data, was 1.20. The June 2011 ratio was 1.17.

Bond markets are marching to the beat of their own drummer--an evil, pessimistic drummer who seems determined to see further weakness regardless of cues from normally related markets. Case in point, we typically see a strong correlation between German Bunds and US Treasuries overnight. To a lesser extent, equities markets and the Euro also tend to be positively correlated with Treasury yields to some extent.

But whereas Bund yields, stocks, and the Euro are all trending lower since around 2am, Treasuries are flat--AND they're flat from fairly ugly, fairly serious levels hit during the Asian session (dancing around the 1.70 level in 10yr yields). They seem almost determined to trade weaker in spite of other cues.

The obvious reason for this (perhaps too obvious) would be the the looming 30yr bond auction later today and the normal "concession" process. We'll no more about that this afternoon and tomorrow, but we do acknowledge that the 3s/10s/30s cycle would be daunting these days where the long-end of the yield curve is such a hot topic.

Further supporting that notion would be the reasonably light volume so far this morning, especially given that we're trading at levels not seen in nearly 2 months. That said, we've also heard of a big trade or two in 10yr options ostensibly alluding to higher yields to come.

On a final note, this morning's economic data didn't really have much of an impact on trading levels. Most of our movement came in the overnight session and now again into the domestic stock market open. All of this is consistent with the "watch and react" stance that Treasuries sometimes take ahead of hotly anticipated news or data. In this case, it's probably (hopefully) the 30yr bond auction.

MBS are holding up fairly well, only down 4 ticks on the day at 103-05 in Fannie 3.0s. Fannie 3.5's are down 3 ticks to 105-20. The next data arrives at 10am with Wholesale Inventories and the 30yr Bond Auction hits at 1pm.

* June trade gap $42.92 bln vs $47.5bln consensus
* Narrowest since December 2010
* Exports +0.9 pct vs May +0.3 pct
* Imports -1.5 pct vs May -0.8 pct
* Exports at $184.97 bln, record high


The U.S. Census Bureau and the U.S. Bureau of Economic Analysis, through the Department of Commerce, announced today that total June exports of $185.0 billion and imports of $227.9 billion resulted in a goods and services deficit of $42.9 billion, down from $48.0 billion in May, revised. June exports were $1.7 billion more than May exports of $183.3 billion. June imports were $3.5 billion less than May imports of $231.4 billion.

In June, the goods deficit decreased $5.4 billion from May to $57.5 billion, and the services surplus decreased $0.3 billion from May to $14.6 billion. Exports of goods increased $1.8 billion to $132.8 billion, and imports of goods decreased $3.6 billion to $190.3 billion. Exports of services decreased $0.2 billion to $52.2 billion, and imports of services increased $0.1 billion to $37.6 billion.

The goods and services deficit decreased $7.4 billion from June 2011 to June 2012. Exports were up $12.3 billion, or 7.1 percent, and imports were up $4.9 billion, or 2.2 percent.

* 361k vs 370k consensus, 367k previous
* Continued Claims up to 3.332 mln from 3.272 mln
* 4wk avg up to 368,250 from 366,000

In the week ending July 28 the advance figure for seasonally adjusted initial claims was 365,000, an increase of 8,000 from the previous week's revised figure of 357,000. The 4-week moving average was 365,500, a decrease of 2,750 from the previous week's revised average of 368,250.

The advance seasonally adjusted insured unemployment rate was 2.6 percent for the week ending July 21, unchanged from the prior week's unrevised rate.

The advance number for seasonally adjusted insured unemployment during the week ending July 21 was 3,272,000, a decrease of 19,000 from the preceding week's revised level of 3,291,000. The 4-week moving average was 3,298,500, a decrease of 11,500 from the preceding week's revised average of 3,310,000.