MBS MID-DAY: Holding Ground After Digesting Morning Weakness

MBS Pricing Snapshot

- Wholesale Inventories +0.6 vs +0.4 Consensus
- Wholesale Sales -1.2 vs +0.1 Consensus
- Stocks/Sales Ratios 1.22 months, highest since Oct 2009
- Commerce Dept says Sandy had positive and negative effects

The U.S. Census Bureau announced today that October 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 $408.5 billion, down 1.2 percent (+/- 0.7) from the revised September level, but were up 2.3 percent (+/-1.1%) from the October 2011 level. The September preliminary estimate was revised downward $0.5 billion or 0.1 percent.

Total inventories of merchant wholesalers, except manufacturers’ sales branches and offices, after adjustment for seasonal variations but not for price changes, were $497.1 billion at the end of October, up 0.6 percent (+/-0.4%) from the revised September level and were up 6.6 percent (+/-1.1%) from the October 2011 level. The September preliminary estimate was revised upward $0.2 billion.

The October inventories/sales ratio for merchant wholesalers, except manufacturers’ sales branches and offices, based on seasonally adjusted data, was 1.22. The October 2011 ratio was 1.17.

The overnight session got off to a lackluster start with very little movement or volume seen during Asian hours. European peripheral debt kicked off the selling trend for European core debt and ultimately US Treasuries. This began at a moderate pace after Italian 10yr debt moved into positive territory on the day (what's good for Italian/Spanish/Greek debt--aka "periphery"--is generally bad for German debt--aka "core." German debt tends to serve as a rough guide for US debt overnight).

The news that seems to have guided the reversal in Italy is questionable and that movement may have been purely incidental. Less questionable is the positive impact from relatively strong Spanish Bill auctions and the night's biggest mover--strong economic data in Germany. The ZEW economic sentiment index was significantly stronger than expected (+6.9 vs -12.0) and capped off a series of negative developments for Core EU debt and US Treasuries.

Given that the economically bullish data was of European origin, the biggest effects were felt/seen first in German Bunds, but Treasuries followed a lower magnitude version of the sell-off at first, and made up ground as the first domestic traders came online. The most recent shock this morning came shortly before the 8:30am economic data as Greece announced their debt buyback target was reached--a precursor for Thursday's bailout payment. The 8:30am Trade Deficit data subsequently had no effect on bond markets.

Post-Roll (January Coupons now) MBS kicked off the domestic session about an eighth of a point weaker than yesterday's latest levels at 104-28 and currently trade in the same territory after an earlier dip to 104-25 following the Greece news. 10yr yields opened more than 2bps higher and are currently just shy of the morning's highs (1.6509) at 1.6472--holding ground for now, but not confidently stampeding back toward unchanged levels.

- Oct Trade Deficit $42.24 Bln vs $42.6 Bln Consensus
- Exports Down 3.6 pct, Most Since Jan 2009

- Imports/Exports At Lowest Level Since April/Feb 2011 Respectively
- Close enough to consensus that this one is having relatively no impact

The U.S. Census Bureau and the U.S. Bureau of Economic Analysis, through the Department of Commerce, announced today that total October exports of $180.5 billion and imports of $222.8 billion resulted in a goods and services deficit of $42.2 billion, up from $40.3 billion in September, revised. October exports were $6.8 billion less than September exports of $187.3 billion. October imports were $4.9 billion less than September imports of $227.6 billion.