MBS MID-DAY: MBS Continue Struggling To Hold Gains

MBS Pricing Snapshot

The Thomson Reuters/University of Michigan Consumer Sentiment Index Fell to 78.3 vs a preliminary reading of 79.2. Economists surveyed by Reuters expected the index to print at 79.0 this morning

In terms of the report's internal components, one of this bigger departures from estimates was the "Current Conditions" index which came in at 85.7 vs 88.0 estimates. Other components were closer to estimate with "Expectations" at 73.5 vs 73.0 and the "12-Month Outlook" at 87 vs 88.

Inflation expectations remain broadly in check with the 1-year outlook at 3.3 pct (vs preliminary readings of 3.5 pct), and the 5-yr outlook in line with initial estimates at 2.8 pct.

- Headline 49.7 vs 53.0 Consensus
- Employment Component 52.0 vs 57.1 Previously, Lowest since March 2010

From ISM Chicago:
The Chicago Purchasing Managers reported the Chicago Business Barometer fell to 49.7, its lowest level in three years. Among the Business Activity measures, five of seven posted declines as New Orders fell below 50 and Order Backlogs contracted for the fourth of the past five months. Prices Paid showed the biggest gain in nearly two years and Supplier Deliveries moved back above 50.

European bond markets (core bond markets, that is) rallied overnight on lingering concerns over Spanish bank stress tests as Spain's 10yr yields rose over 6% again. German Bunds spiked lower just before 5am New York time as rumors circulated that Spain is 'secretly' up to €150 bln in bailout/recapitalization needs.

The microscope on Spain, along with month-end/quarter-end asset allocation buying was enough to get Treasuries in the door at lower yields than yesterday's best levels. MBS opened higher as well, even though they couldn't muster a similar pivot off y'day's highs. Gains extended slightly as Incomes/Outlays showed that higher gas prices led consumer spending and that inflation-adjusted spending only grew 0.1 pct in August vs 0.4 pct in July.

But the gains were short-lived. 10's moved briefly under 1.61 and are now back over 1.62, in line with their 5am-8am range. Fannie 3.0 MBS moved as high as 105-26 after opening at 105-23, but have since fallen to the lows of the morning at 105-19. Mortgages continue to look tired compared to Treasuries.

As discussed in The Day Ahead, we're slightly more interested in the data arriving later in the morning as it covers more recent time periods and has EMPLOYMENT components. This assumes, of course, that yesterday's selling after the 8:30am data was an admission that markets were trading Jobless Claims over Durable Goods based on the Fed's focus on Employment-related data.

Chicago PMI at 9:45am and Consumer Sentiment at 9:55am. Beware some increased selling pressure as this alert has been written. Although specific levels are referenced, markets have definitely been in transit over the past 20 minutes and in an exclusively weaker direction for MBS.

- Spending +0.5 vs +0.5 consensus
- Income +0.1 vs +0.2 consensus
- "Real" Consumer Spending +0.1 vs +0.4 in July
- Savings Rate falls from 4.1 to 3.7

Personal income increased $15.0 billion, or 0.1 percent, and disposable personal income (DPI) increased $12.5 billion, or 0.1 percent, in August, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $57.2 billion, or 0.5 percent. In July, personal income increased $18.5 billion, or 0.1 percent, DPI increased $15.4 billion, or 0.1 percent, and PCE increased $45.4 billion, or 0.4 percent, based on revised estimates.

Real disposable income decreased 0.3 percent in August, in contrast to an increase of 0.1 percent in July. Real PCE increased 0.1 percent, compared with an increase of 0.4 percent.

Personal outlays -- PCE, personal interest payments, and personal current transfer payments -- increased $60.0 billion in August, compared with an increase of $48.2 billion in July. PCE increased $57.2 billion, compared with an increase of $45.4 billion.