MBS MID-DAY: Moderate Weakness And Volatility Continue

MBS Pricing Snapshot

- Headline Sentiment 84.9 vs 83.0 consensus
- current conditions 91.3 vs 88.8 consensus
- 'expectations' 80.8 vs 79.6
- headline sentiment and expectations highest since July 2007
- current conditions highest since January 2008

The U.S. Census Bureau announced today that September 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 $414.0 billion, up 2.0 percent (+/-0.7) from the revised August level and were up 4.4 percent (+/-0.9%) from the September 2011 level. The August preliminary estimate was revised upward $0.5 billion or 0.1 percent. September sales of durable goods were up 1.2 percent (+/-0.9%) from last month and were up 2.8 percent (+/-1.2%) from a year ago. Sales of electrical and electronic goods were up 3.7 percent from last month and sales of metals and minerals, except petroleum were up 2.5 percent. Sales of nondurable goods were up 2.7 percent (+/-0.9%) from August and were up 5.7 percent (+/-1.2%) from last September. Sales of petroleum and petroleum products were up 8.3 percent from last month.

Total inventories of merchant wholesalers, except manufacturers’ sales branches and offices, after adjustment for seasonal variations but not for price changes, were $494.2 billion at the end of September, up 1.1 percent (+/-0.4%) from the revised August level and were up 7.5 percent (+/- 1.2%) from the September 2011 level. The August preliminary estimate was revised upward $1.3 billion or 0.3 percent. September inventories of durable goods were up 0.9 percent (+/-0.4%) from last month and were up 8.2 percent (+/-1.1%) from a year ago. Inventories of metals and minerals, except petroleum were up 1.9 percent from last month and inventories of machinery, equipment, and supplies were up 1.5 percent. Inventories of nondurable goods were up 1.4 percent (+/-0.5%) from August and were up 6.5 percent (+/-2.6%) from last September. Inventories of farm product raw materials were up 7.3 percent from last month and inventories of petroleum and petroleum products were up 5.5 percent.

The September inventories/sales ratio for merchant wholesalers, except manufacturers’ sales branches and offices, based on seasonally adjusted data, was 1.19. The September 2011 ratio was 1.16.

10yr yields came back from their nightly 3 hour break right in line with yesterday's 5pm levels and moved mostly lower throughout the overnight session in mostly good volume, ultimately hitting New York hours in the high 1.59s. That translated to MBS opening higher a few ticks in Fannie 3.0s, but both have since reversed course.

The damage, relative to yesterday, is more pronounced in MBS at the moment, which are actually 4 ticks in the red at 105-11 in Fannie 3.0s. 10yr yields, on the other hand, have just barely risen into negative territory

The Import/Export Prices data didn't have much of an effect, which is generally expected of all inflation data these days. That said, it might have actually had some effect (!), coming in +0.5 vs +0.0 expectations. The bigger considerations and bigger market movers have been tradeflows and technicals with the last visit to the high 1.5's in 10yr yields likely seen as a decent enough resistance level, either for consolidation or even a bounce.

In addition, there's more to come on the calendar for the day with Consumer Sentiment at 9:55 and Wholesale Inventories at 10am. For those who can manage to stick around for it, one of the most significant events of the day could be a 1:05pm speech from Obama on the "Fiscal Cliff." This is a topic that has been constantly increasing in importance throughout 2012 and drastically so following the election. Some of the bounce back into weaker territory in bond markets could be a hedge against Obama saying something encouraging or hopeful about tackling the cliff.

On a final note, remember that it's "Notification Day" for Fannie and Freddie 30yr MBS, meaning we'll see prices drop at the end of the session. Roll-related liquidity issues can definitely have an effect on how MBS are trading vs Treasuries so varying degrees of underperformance are to be expected.

- Imports +0.5 pct vs +0.0 consensus, +1.1 previously
- Exports unchanged vs +0.2 consensus

Import prices rose for the third consecutive month in October, increasing 0.5 percent after a 1.1 percent advance in September and a 1.2 percent rise in August. This upturn was largely driven by higher fuel prices, although nonfuel prices also increased in October and September. Led by the recent advances, overall import prices ticked up 0.4 percent for the year ended in October, which was the first 12-month rise in import prices since April.

Export prices recorded no change in October as rising nonagricultural prices were offset by a downturn in prices for agricultural exports. The price index for overall exports had risen in each of the previous three months, advancing 2.1 percent overall for the third quarter of 2012. Prices for overall exports increased 1.4 percent over the past year, the first 12-month advance for the index since April.