MBS MID-DAY: Volatile Morning, Disconnected From Data

MBS Pricing Snapshot

- Sales 417k vs 420k consensus, 411k previously
- SFR sales +1.5 pct vs -7.6 pct previously
- Northeast +20.6, South +19.4, Midwest +12.1, West -20.9

Sales of new single-family houses in March 2013 were at a seasonally adjusted annual rate of 417,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 1.5 percent (±16.9%)* above the revised February rate of 411,000 and is 18.5 percent (±17.2%) above the March 2012 estimate of 352,000.

The median sales price of new houses sold in March 2013 was $247,000; the average sales price was $279,900. The seasonally adjusted estimate of new houses for sale at the end of March was 153,000. This represents a supply of 4.4 months at the current sales rate.

Just about as fast as the overnight session took Treasuries well below their previous 2013 floor, the past hour has taken them right back above it, and then some! 10's flirted with mid 1.67's, but once broken, the move up over 1.69 has been quick, following the the solid gains in the first 25 minutes of domestic cash equities trading.

MBS have taken it on the chin as well, turning negative on the day, currently swinging between +1 and -1 ticks on the day around 104-07. For most lenders this will be too early in the day for a negative reprice as most aren't out with rates yet.

That said, the lowest levels of the past few minutes are an eighth of a point off the prices seen when the earliest lenders released rate sheets and thus could be grounds for a negative reprice, but lenders might give it a few more minutes to play out considering the volatility.

On a final technical note, there's a case to be made for support at 1.693 based on overnight levels and 10's just crossed it (1.6945 currently). That could pave the way for quicker losses and more pain for MBS. Stay cautious if you got early pricing from a lender who has been historically willing to reprice in the morning.

This is a very big morning for bond markets as it marks the first meaningful foray outside the long term uptrend in rates stretching back to mid July 2012. In addition to the upwardly sloped trend being challenged, we're also seeing a potential pivot point in the mid 1.67's (10yr yield). While 1.683 has been the "modal" (most frequently recurring) resistance floor, the periodic pops below that have turned round at 1.677 and a.673. This morning, after 10's ran as low as the mid 1.64's, they've returned to the mid 1.67's and encountered support in the mid 1.67's so far. If that continues to be the case, it would be a classic example of previous resistance acting as new support (aka "pivot" or "inflection" point).

True to Technical Analysis 101's cardinal rules, the moves happened in big volume. Perhaps even more interesting though (and still very much a hallmark of a technical move), they weren't motivated by a singular piece of watershed data though much has been made of Germany's flash PMI reading at 3:30am, which pointed to further contraction, coming in at 47.9 vs 49.0 in the Manufacturing sector and moving into negative territory on the Services side (49.2 vs 51.0).

Another glut of demand washed over Treasuries as the monthly lows were broken just after a short term Spanish debt auction at 4:40am. The timing of the auction looks to be more of an incidental factor as Treasuries were marching to their own beat as they shot a quick 2bps lower. It looks more like algorithmic buying.

All of the above brought 10's into the domestic session under the 1.675 approximate long term pivot and helped MBS open several ticks into the green. Fannie 3.0s are currently up 5 ticks at 104-11, and Treasuries have given up some ground ahead of the stock market cash open. 10's are right on the line at 1.676 as S&P futures close in on a 10 point improvement.

The first round of domestic economic data is already out with Home Prices rising 0.7 pct and Markit Manufacturing PMI coming in moderately weaker than expected. Neither was a big mover and more to the point, bond markets moved the opposite direction from the PMI data's implication. As we noted in this morning's commentary, these counterintuitive moves make for good information on underlying technical trends and this one pointed to intraday resistance at a floor of 1.665 in 10yr yields--possibly also implying a test to break back above the bigger-picture pivot point at 1.683.

- Prices +0.7 vs +0.6 previously
- Year over year increase rises to 7.1 from 6.5 previously

U.S. house prices rose 0.7 percent on a seasonally adjusted basis from January to February, according to the Federal Housing Finance Agency’s monthly House Price Index (HPI). For the 12 months ending in February, U.S. house prices rose 7.1 percent. The U.S. index is 13.6 percent below its April 2007 peak and is roughly the same as the October 2004 index level. U.S. house prices have not declined on a monthly basis since January 2012.

For the nine census divisions, seasonally adjusted monthly price changes from January to February ranged from -0.6 percent in the Middle Atlantic division to +1.7 percent in the South Atlantic division, while the 12-month changes ranged from +1.9 percent in the Middle Atlantic division to +15.3 percent in the Pacific division.

FHFA uses the purchase prices of houses with mortgages owned or guaranteed by Fannie Mae or Freddie Mac to calculate the monthly index. Monthly index values and appreciation rate estimates for recent periods.

- Headline PMI 52.0 vs 54.0 consensus, 54.6 previously
- Manufacturing Output 53.6 vs 56.6 previously
- New Oders 51.8 vs 55.4 previously

The Markit Flash U.S. Manufacturing Purchasing Managers’ Index fell to its lowest reading in six months during April. At 52.0, the flash PMI index, which is based on around 85% of usual monthly replies, was down from 54.6 in March and indicated a moderate improvement in overall manufacturing business conditions.

Manufacturers recorded higher production levels in April, but the rate of output growth slowed further from February’s near one-year peak. Overall, the latest increase in output was moderate and the weakest since last November.

Commenting on the flash PMI data, Chris Williamson, Chief Economist at Markit said:

“The biggest monthly fall in the PMI since June 2010 raises concerns that the U.S. manufacturing expansion is losing momentum rapidly as businesses and households worry about the impact of tax hikes and government spending cuts. The PMI suggests that output growth has slowed from an annual pace approaching 8% earlier in the year to only 2% at the start of the second quarter.

“While this week’s first quarter GDP numbers may therefore bring some brighter news on the economy, the picture looks to have already begun to darken again, with GDP growth set to weaken in the second quarter.