MBS MID-DAY: Mortgages Underperform While Bond Markets Weaken

MBS Pricing Snapshot

- Inventories -0.1 vs +0.4 consensus
- Sales +0.0 vs +0.6 consensus

The U.S. Census Bureau announced today that December 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 $418.9 billion, virtually unchanged (+/- 0.5)* from the revised November level, but were up 3.7 percent (+/-1.1%) from the December 2011 level. The November preliminary estimate was revised downward $0.6 billion or 0.1 percent. December sales of durable goods were down 0.9 percent (+/-1.1%)* from last month, but were up 0.9 percent (+/-1.4%)* from a year ago. Sales of professional and commercial equipment and supplies were down 2.3 percent from last month. Sales of nondurable goods were up 0.8 percent (+/-0.5%) from November and were up 6.1 percent (+/-1.6%) from last December. Sales of drugs and druggists' sundries were up 4.8 percent from last month and sales of beer, wine, and distilled alcoholic beverages were up 1.8 percent

Total inventories of merchant wholesalers, except manufacturers’ sales branches and offices, after adjustment for seasonal variations but not for price changes, were $497.7 billion at the end of December, down 0.1 percent (+/-0.4%)* from the revised November level, but were up 5.5 percent (+/-1.2%) from the December 2011 level. The November preliminary estimate was revised downward $0.7 billion or 0.1 percent. December inventories of durable goods were up 0.2 percent (+/-0.5%)* from last month and were up 7.7 percent (+/-1.6%) from a year ago. Inventories of electrical and electronic goods were up 2.6 percent from last month, while inventories of motor vehicle and motor vehicle parts and supplies were down 3.8 percent. Inventories of nondurable goods were down 0.6 percent (+/-0.5%) from November, but were up 2.4 percent (+/-1.9%) from last December. Inventories of farm product raw materials were down 6.0 percent from last month and inventories of drugs and druggists' sundries were down 4.3 percent.

While it's nothing on the scale of NFP Volume or even some of the other bigger days last week, Treasury volume picked up substantially into the 9:30am opening bell for stocks. The latter have surged to fresh 5 year highs in short order with cash S&P's at 1516.65.

10yry yields are now looking like they're making a major technical rejection of the 1.93's and have shot quickly higher to 1.975. MBS have essentially continued to hold the same underperformance vs Treasuries and thus are even worse off with Fannie 3.0's now down to 103-01.

Prices have been a moving target. Any lender that's already out with rate sheets is likely to reprice for the worse.

The illiquidity potential mentioned in this morning's Day Ahead, is playing out in far far grander fashion than we might have expected with wide buyers and sellers reading from two different scripts, neither side fully sure of where the real market is or should be. The extra bit of volatility and uncertainty that's come along with this morning's illiquidity could, in part, draw on the uncertainty introduced by the Boxer bill being reintroduced yesterday, as well as earlier news that 45 members of the house urged the President to replace DeMarco (Huff Post story).

Whatever the underlying attributions may be, what's clear is that MBS are struggling for MBS-specific reasons. That struggle is only marginally compounded by weaker bond markets into the morning with 10's merely edging up from 1.937 to 1.9517 currently. S&P futures have added a few points ahead of the open and are back in line with 9:50am levels from yesterday (before they started their fairly big slide).

On a positive note, as seen in the chart from the Day Ahead, If MBS manage to stabilize here, we'd still be right around the intermediate support of 103-00 after tonight's roll. The other positive is that the initial slide in prices looks to be settling down here, but perhaps most positive is that the drama is occurring before rate sheet time. That's not positive vs yesterday, but since it's no longer yesterday, we'll look on the bright side.

- Trade Deficit $38.54 bln, narrowest since Jan 2010
- Exports +2.1 pct vs +1.0 last month
- Imports -2.7 pct vs +3.7 pct last month
- Opec deficit $3.4 bln vs $6.6
- Petroleum deficit lowest since August 2009
- Crude Imports lowest since Feb 1997
- Total 2012 deficit $540 bln vs $559.9 bln in 2011

The U.S. Census Bureau and the U.S. Bureau of Economic Analysis, through the Department of Commerce, announced today that total December exports of $186.4 billion and imports of $224.9 billion resulted in a goods and services deficit of $38.5 billion, down from $48.6 billion in November, revised. December exports were $3.9 billion more than November exports of $182.5 billion. December imports were $6.2 billion less than November imports of $231.1 billion.

In December, the goods deficit decreased $9.4 billion from November to $56.2 billion, and the services surplus increased $0.7 billion from November to $17.7 billion. Exports of goods increased $3.3 billion to $132.6 billion, and imports of goods decreased $6.1 billion to $188.8 billion. Exports of services increased $0.6 billion to $53.8 billion, and imports of services decreased $0.1 billion to $36.1 billion.

The goods and services deficit decreased $13.2 billion from December 2011 to December 2012. Exports were up $8.6 billion, or 4.9 percent, and imports were down $4.6 billion, or 2.0 percent.

It was a generally quiet overnight session for bond markets. 10yr Treasuries rose toward 1.97 in early Asian hours, but improved steadily before meeting resistance just above yesterday's low yields.

The European session brought stronger-than-expected Trade data from Germany. While this did have some upward pressure on yields, it was even less than that seen earlier in the session and 10's stayed under 1.96, finally moving quickly back to 1.94 as early domestic trading got underway.

10's are currently at 1.941. S&P futures are 1 pt off yesterday's 4pm levels after treading only about 4 points higher overnight and Fannie 3.0s opened 4 ticks higher at 103-14. International Trade is coming up at 8:30am and expected to show a slightly narrowing trade gap of $46 bln vs last month's $48.7 bln. After that, Wholesale Inventories at 10am is the only remaining report of the morning.