MBS MID-DAY: Flat To Start, Rallying After Opening Bell, Sentiment Helped

MBS Pricing Snapshot

- Headline Sentiment 71.8 vs 78.0 Consensus
- Current Conditions 87.5 vs 87.5 Consensus
- Expectations Index 61.7 vs 68.0
- 12 Month Index 70 vs 87 Consensus

(Reuters) - U.S. consumer sentiment tumbled to its lowest since December 2011 in early March, hit by dissatisfaction with government economic policies and as fewer Americans expected to see improvements in growth or the labor market, a survey released on Friday showed.

The Thomson Reuters/University of Michigan's preliminary reading on the overall index on consumer sentiment dropped to 71.8 from 77.6 in February, short of expectations for 78.

Across-the-board government spending cuts of $85 billion went into effect at the beginning of the month after U.S. lawmakers failed to come to a new deal.

A record 34 percent of respondents made unfavorable references to government economic policies, beating January's prior record of 31 percent.

"The frustrations expressed by consumers essentially involve how little consideration has been given to how the government’s inability to reach a compromise affects people’s economic situation," survey director Richard Curtin said in a statement.

- Output +0.7 vs +0.4 consensus, 0.0 in Jan
- Capacity Use Rate 79.6 vs 79.3 consensus
- Manufacturing +0.8 vs -0.3 in Jan
- Market Reaction: Little, if any. MBS still unchanged on the day.

Industrial production increased 0.7 percent in February after having been unchanged in January. Manufacturing output rose 0.8 percent in February, and the index revised up for the previous two months. In February, the output of utilities advanced 1.6 percent, as temperatures for the month were near their seasonal norms after two months of unseasonably warm weather. The production at mines declined 0.3 percent, its third consecutive monthly decrease. At 99.5 percent of its 2007 average, total industrial production in February was 2.5 percent above its level of a year earlier. The capacity utilization rate for total industry increased to 79.6 percent, a rate that is 0.6 percentage point below its long-run (1972--2012) average.

Keeping in the recently espoused theme of the "post-NFP consolidation" between 2.0 and 2.075 (in terms of 10yr yields), Treasuries had a super sideways and narrow overnight session. The trading range was roughly 1.5 bps between 2.03 and 2.045. The tight range and light volumes bring us that much closer to making it through to next week without major drama, but it is a "quadruple witching" day, which can create tradeflow-related volatility.

MBS opened up right in line with yesterday's latest levels and has continued to trade fairly tight, between 102-12 and 102-15 through the first two pieces of data this morning. It's not that CPI or Empire State Manufacturing were exceptionally likely to move markets, but their uneventful passing brings us that much closer to the end of the week.

Industrial Production is coming up in 1 minute with Consumer Sentiment following at 9:55am. Bottom line: hoping to hold calmly sideways, but prepared for tradeflow-inspired volatility. It could also come from a big miss or beat in one of the upcoming data sets, which we'll see shortly.

- Headline CPI +0.7 vs +0.5 Consensus
- Core CPI +0.1741 vs +0.2 Consensus

The gasoline index rose 9.1 percent in February to account for almost three-fourths of the seasonally adjusted all items increase. The indexes for electricity, natural gas, and fuel oil also increased, leading to a 5.4 percent rise in the energy index. The food index increased slightly in February, rising 0.1 percent. A sharp increase in the fruits and vegetables index was the major cause of the 0.1 percent increase in the food at home index, with other major grocery store food group indexes mixed.

- 9.24 vs 10.0 Consensus, 10.04 in Feb
- Employment 3.23 vs 8.08 in Feb
- New Orders 8.18 vs 13.31 in Feb
- 6-Month Outlook 36.43 vs 33.07 in Feb

The March 2013 Empire State Manufacturing Survey indicates that conditions for New York manufacturers continued to improve modestly. The general business conditions index was positive for a second consecutive month and, at 9.2, was little changed. The new orders and shipments indexes also remained above zero, though both were somewhat lower than last month’s levels. Price indexes showed that input price increases continued at a steady pace while selling prices were flat. Employment indexes suggested that labor market conditions were sluggish, with little change in employment levels and the length of the average workweek. Indexes for the six-month outlook pointed to an increasing level of optimism about future conditions, with the future general business conditions index rising to its highest level in nearly a year.

In a series of supplementary questions, firms were asked about cash holdings, debt levels, and methods of financing capital spending. Queried about expected changes in their outstanding debt in the year ahead, manufacturers indicated an increasingly widespread inclination to take on more debt. When asked about anticipated changes in cash holdings in the year ahead, more respondents anticipated decreases than increases—for the first time since 2008. Manufacturers, on average, also reported that they were currently holding less cash than usual.