MBS MID-DAY: Mortgages Struggling Less Vs Treasuries, But At Cost Of Sell-Off

MBS Pricing Snapshot

- Index at 47 vs 48 Consensus, Previously 47
- Current SFR Sales 51, unchanged
- Prospective Buyers 37 vs 36 Previously
- Prospective Buyers Highest Since April 2006

Builder confidence in the market for newly built, single-family homes was unchanged in January, remaining at a level of 47 on the National Association of Home Builders/Wells Fargo Housing Market Index, released today. This means that following eight consecutive monthly gains, the index continues to hold at its highest level since April of 2006.

“Conditions in the housing market look much better now than at the beginning of 2012 and an increasing number of housing markets are showing signs of recovery, which should bode well for future home sales later this year,” said Barry Rutenberg, chairman of the National Association of Home Builders (NAHB) and a home builder from Gainesville, Fla. “However, uncertainties stemming from last month’s fiscal cliff negotiations contributed to the pause in builder confidence and continuing discussions among policymakers related to spending cuts and the future of the mortgage interest deduction could put a damper on housing demand in the coming months.”

“Builders’ sentiment remains very close to the index’s tipping point of 50, where an equal number of builders view conditions as good and poor, and fundamentals indicate continued momentum in housing this year,” said NAHB Chief Economist David Crowe. “However, persistently tight mortgage credit conditions, difficulties in obtaining accurate appraisals and the ongoing stalemate in Washington over critical economic concerns continue to impede the housing recovery.”

Different day, same story... Bond markets stronger overnight, stocks weaker... Stocks correct in the AM, bond markets correct a bit less. Both fall again (bonds in yield, stocks in price) after the 8:30 data, bottom out and continue previous correction higher in yield for bonds, prices for stocks. All of the above is playing out similarly for MBS, on a somewhat smaller scale where Fannie 3.0s are only down a tick or two from the last update while Treasuries have shed 3-4 ticks.

Fannie 3's are still 1 tick in the green on the day at 104-13 while 10's are at their highest yields of the morning (still 1.75bps lower than y'day at 5pm) at 1.8185. Equities are at their highs as well with S&P futures now challenging yesterday's early afternoon ceiling near 1465 (roughly 1470 in cash).

Any of this pointing toward reprice risk? That seems like an awfully tall order for a mere 4 tick range in MBS. Not impossible for 1 particular lender to be considering it, but not likely for any others.

Asian equity markets sold off to begin the overnight session with a stronger Yen helping push the Nikkei down 2.6%. That set a risk-off tone that persisted through the early morning hours of the domestic session with the biggest jolt of improvement for bond markets coming after equities futures bounced off a short term ceiling at 6:25am.

That was part of broader phenomenon that's been playing out fairly consistently ever since Bond markets hit recent multi-month price lows in the past two weeks. It's characterized by Treasuries (and to a lesser extent MBS), improving more when stocks are declining and weakening less when stocks are gaining, but most of the time, maintaining that positive correlation. In other words, the stock lever is well connected moment-to-moment, but bonds have been outperforming, winning small victories here and there. Perhaps that's to be expected after cresting 1.9's in 10yr yields...

But what about MBS? They haven't been doing as well as Treasuries for most of 2013 so far. Here too, there's the same minute-to-minute correlation seen between stocks and bonds, but Treasuries are winning those smaller victories as well. Several likely motivations include the ramping up of new origination supply after the holidays (see MBA Apps up BIG this morning) as well as the longer term range-finding of MBS spreads vs Treasuries. They'd risen to multi-month highs in mid-November and have been steadily declining (or "tightening") until Treasury yields topped out after January NFP.

Additionally, Treasuries just generally "lead" risk-on/risk-off moves in bond markets with MBS tending to make smaller versions of the same movements (don't forget that MBS were relatively A LOT less damaged by the December to January Sell-Off than Treasuries. Turnabout's fair play).

That brings us to the morning situation where Fannie 3.0s are up 3 ticks vs yesterday at 104-14 while 10yr yields are up 7 ticks in price, bringing yields 2.24 bps lower. Morning data has been a non-event and generally untraded. Stocks have been rising since 7am and are currently revisiting the same ceiling mentioned in regard to the overnight session (1464 in futures, currently equates to 1459 in cash S&Ps). If Treasuries are as connected to stocks as they seem to be (on that minute-to-minute basis), then a break above that ceiling in stocks could be the signal for Bond markets to re-visit their weakest levels of the morning. We're pretty close right now, so maybe we should say, "if stocks break higher, so may bond markets," though the impending Fed buying at 10:15am could throw the correlation off for a bit.

- Headline Industrial Output +0.3 vs +0.3 Consensus
- Capacity Utilization: 78.8 vs 78.5 Consensus
- Utilities output -4.8 vs +0.2 in Nov, Fed cites warm weather
- Excluding Cars/Parts, Output +0.1 vs +0.7 in Nov.

Industrial production increased 0.3 percent in December after having risen 1.0 percent in November when production rebounded in the industries that had been negatively affected by Hurricane Sandy in late October. For the fourth quarter as a whole, total industrial production moved up at an annual rate of 1.0 percent. Manufacturing output advanced 0.8 percent in December following a gain of 1.3 percent in November; production edged up at an annual rate of 0.2 percent in the fourth quarter. The output at mines rose 0.6 percent in December, and the output of utilities fell 4.8 percent as unseasonably warm weather held down the demand for heating. At 98.1 percent of its 2007 average, total industrial production in December was 2.2 percent above its year-earlier level. Capacity utilization for total industry moved up 0.1 percentage point to 78.8 percent, a rate 1.5 percentage points below its long-run (1972--2011) average.

- Headline CPI declined 0.0199 vs 0.0 consensus
- Core CPI (excludes food/energy) +0.1 vs +0.2 consensus
- Quick thoughts: Inflation data continues to sit near the back of the room full of economic indicators, never raising its hand. This has been the case for several years, and most notably since the initial QE2 fears worked their way out of markets in late 2010, early 2011 (themselves not nearly as developed as the early 2009 inflation panic). Markets don't trade this report and despite bond market strength in the past 8 minutes, they're not trading it today either. It won't always be this way, but until further notice, PPI and CPI are relics of a bygone era. Again, this could quickly change if they move to the front of the class and start acting up.

From the BLS:
The Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in December on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.7 percent before seasonal adjustment.

The gasoline index declined again in December, but other indexes, notably food and shelter, increased, resulting in the seasonally adjusted all items index being unchanged. Gasoline was the only major energy index to decline; the indexes for natural gas and electricity both increased. Within the food category, five of the six major grocery store food groups increased as the food at home index rose for the third consecutive month.

The index for all items less food and energy increased 0.1 percent in December, the same increase as in November. Besides shelter, the indexes for airline fares, tobacco, and medical care also increased. The indexes for recreation, household furnishings and operations, and used cars and trucks all declined in December.

The all items index increased 1.7 percent over the last 12 months, compared to a 1.8 percent figure in November. The index for all items less food and energy rose 1.9 percent over the last 12 months, the same figure as last month. The food index has risen 1.8 percent over the last 12 months, and the energy index has risen 0.5 percent.