MBS MID-DAY: Slight Extension Of Yesterday's Weakness

MBS Pricing Snapshot

- 82.7 vs 84.5 consensus
- Expectations 77.6 vs 80.1

- (Reuters) - U.S. consumer sentiment stalled at the end of November as uncertainty grew over federal tax and spending programs next year, a survey released on Wednesday showed.

The Thomson Reuters/University of Michigan's final reading on the overall index on consumer sentiment came in at 82.7, a touch up from 82.6 the month before, but down from a preliminary reading of 84.9 released earlier in the month.

It was below the median forecast of 84.5 among economists polled by Reuters.

"The late-month retreat was accompanied by more economic uncertainty about future federal taxes and spending programs and the inability of the political parties to reach a settlement," survey director Richard Curtin said in a statement.

It's been a mostly unpleasant morning so far with some potentially disconcerting price action in MBS. Fannie 3.0s are currently struggling to get back above yesterday afternoon's lows. Even though we came in at 104-23, we quickly moved lower and have since seen several instances of resistance at 104-22, the same level that provided a firm floor of support yesterday afternoon. That's a classic ratcheting technical movement that, at the very least, sets up 104-22 as an important level to watch for the rest of the day.

Things are somewhat similar in Treasuries, though the weakness is slightly more pronounced. Bond markets showed their hand early in the overnight session after Germany's Schaeuble said that there is no agreement coming this week on Greece and that Eurozone Finance ministers would meet again on Monday. At first, markets took the news poorly with equities futures dropping 10 S&P points in the blink of an eye. 10yr yields were a bit more sober in response, merely shedding 3bps. But it's the bounce that's more telling.

After losing ground initially on that news, bond yields and stocks both began rising steadily. Stocks leveled off somewhat into the domestic open and Treasuries did not (although they might be now, fingers crossed). The pops in price action and volume came NOT on the economic data, but rather were purely driven by tradeflows. Bottom line, accounts are lightening up on positions heading into what, for many, will be a four day weekend.

Please note, that does NOT mean we should simply tune out and disregard the negative price action today, hoping that everything will "go back to the way it was" on Monday. The unfortunate reality is that things can always go either way. Even if there's a temptation to "hope" that things turn around when markets get back to business next week, they'll be doing so from a point of greater neutrality, leaving the door equally open to re-engage longs or continue the sell-off.

- PMI 52.4 vs 51.0 Consensus

Key points:

• PMI signals moderate improvement in manufacturing business conditions
• Both output and new order growth quicken to five-month highs
• Strongest rise in employment since July
• Average input prices increase markedly

The Markit Flash U.S. Manufacturing Purchasing Managers’ Index™ (PMI™)1 signalled the strongest improvement in U.S. manufacturing business conditions for five months in November. The preliminary ‘flash’ PMI reading, which is based on around 85% of usual monthly replies, rose to 52.4 from 51.0 in October to indicate a moderate manufacturing expansion overall.

PMI index readings above 50.0 signal an increase or improvement on the prior month, while readings below 50.0 indicate a decrease.

- 410k vs 410k Consensus
- Previous week revised higher to 451k from 439k
- Continued Claims Fell to 3.337 mil vs 3.345 mil Consensus
- Claims still distorted by Hurricane Sandy

In the week ending November 17, the advance figure for seasonally adjusted initial claims was 410,000, a decrease of 41,000 from the previous week's revised figure of 451,000. The 4-week moving average was 396,250, an increase of 9,500 from the previous week's revised average of 386,750.

The advance seasonally adjusted insured unemployment rate was 2.6 percent for the week ending November 10, unchanged from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending November 10 was 3,337,000, a decrease of 30,000 from the preceding week's revised level of 3,367,000. The 4-week moving average was 3,285,000, an increase of 19,500 from the preceding week's revised average of 3,265,500.