MBS MID-DAY: Weaker Despite GDP Miss, Settling In For FOMC

MBS Pricing Snapshot

Bond markets began the overnight session in moderately weaker territory as Asia traded generally "risk-on" (higher stocks, weaker yen, higher bond yields). Strong data in the UK and sell-biased tradeflows from central banks contributed to an extension of the weakness in the European hours.

The latter saw 10yr yields rise to 2.035 just after 3:30am. From there, some of the weakness ebbed into the domestic session and equities futures supported the notion of "pausing" the overnight "risk-on" moves. MBS came in the door a few ticks weaker than yesterday's close.

ADP Payrolls were better than expected and provided the first dose of volatility in the domestic session, taking Fannie 3.0s briefly below 103 for the first time since August. All told, it was a mere hiccup for broader bond markets, which digested the data fairly well. 10's rose by not even half a bp before turning around and waiting for GDP.

After GDP printed a surprise -0.1, volume spiked and yields zipped a quick 3 bps lower. Everything was "risk-off" for 2 minutes or so, before stocks and bond yields bounced back higher. Stocks went sideways until the opening bell, shot to the highs of the morning 20 minutes later, and have since been selling off mildly with the S&P down 5 points from the highs.

Bond markets are having none of it, however... 10'd disconnected from the stock lever CONVINCINGLY at 9:08am, rose to 2.02, and have traded within a bp of that ever since. MBS consequently moved back into their "fear of duration" stance and Fannie 3.0s are back at their lows of the morning (102-31+ at the moment).

Is the disconnection and the weakness simply a defensive stance heading into this afternoon's FOMC? Probably... Not much going on until then, save for the 1pm 7yr Note Auction, but that's almost not worth mentioning in light of 2:15pm FOMC. Keep in mind, there's no press conference with today's release, so extra volatility is possible as the statement remains open to interpretation without clarification from Bernanke and framing by the member forecasts.

- GDP -0.1 pct vs +1.1 Consensus
- Deflator +0.6 vs +1.5 Consensus
- PCE Price Index +1.2 vs +1.7 Consensus
- Exports -5.7, first drop since Q109
- Business Inventory changes account for 1.27 of drop
- Headline GDP, first decline since Q209

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- decreased at an annual rate of 0.1 percent in the fourth quarter of 2012 (that is, from the third quarter to the fourth quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 3.1 percent.

The Bureau emphasized that the fourth-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency (see the box on page 4 and the "Comparisons of Revisions to GDP" on page 5). The "second" estimate for the fourth quarter, based on more complete data, will be released on February 28, 2013.

The decrease in real GDP in the fourth quarter primarily reflected negative contributions from private inventory investment, federal government spending, and exports that were partly offset by positive contributions from personal consumption expenditures (PCE), nonresidential fixed investment, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, decreased.

- Payrolls 192k vs 165k Consensus
- December Revised to 185k From 215k
- Market Reaction: Initially, bond markets extended morning weakness, but have since pulled back to their best levels of the domestic session (which are still slightly weaker than Tuesday's closing levels).

Private sector employment increased by 192,000 jobs from December to January, according to the January ADP National Employment Report, which is produced by ADP, a leading provider of human capital management services, in collaboration with Moody’s Analytics. The report, which is derived from ADP’s actual payroll data, measures the change in total nonfarm private employment each month on a seasonally adjusted basis. The December 2012 report, which reported job gains of 215,000, was revised downward by 30,000 to 185,000 jobs.

"U.S. private sector employment got off to a good start in 2013, as 192,000 jobs were added during the month of January," noted Carlos A. Rodriguez, president and chief executive officer of ADP. "According to the ADP National Employment Report, private sector employers created an average of 183,000 new jobs per month during the last three months. This is an encouraging sign of steady improvement in the job market."

Mark Zandi, chief economist of Moody’s Analytics, said, “The job market is slowly, but steadily, improving. Monthly job gains appear to have accelerated from near 150,000 to closer to 175,000. Construction is finally kicking into gear and more than offsetting the weakness in manufacturing. The recent gains may be overstating any improvement, particularly in the context of recent revivals in growth at the start of the past three years, but the gains are encouraging nonetheless.”