MBS MID-DAY: First Indications of a "Lead-Off" From Sideways Range

MBS Pricing Snapshot

- Headline +76.4 vs 73.2 Consensus
- Current Conditions 89.9 vs 85.0 Consensus
- Expectations 67.8 vs 64.6 Consensus

- Market Reaction: Not too terribly bad for bond markets. 10's are holding near 1.68 and Fannie 3.0s have given up 1 to 1.5 ticks since the release. More than anything, the stronger-than-expected report looks like a confirmation of the resistance to the GDP rally as opposed to a distinct, organic source of movement.

(Reuters) - U.S. consumer sentiment eased in April as Americans remained concerned about their employment and financial prospects, a survey released on Friday showed.

The Thomson Reuters/University of Michigan's final reading on the overall index on consumer sentiment fell to 76.4 from 78.6 in March, although it topped economists' expectations for 73.2. It also was an improvement from April's preliminary reading of 72.3.

The barometer of current economic conditions fell to 89.9 from 90.7, while the gauge of consumer expectations slipped to 67.8 from 70.8.

Just 23 percent of consumers anticipated a decline in the unemployment rate during the coming year, while three out of four expected an unchanged or higher jobless rate.

Consumers continued to take a grim view of government economic policy, with just 9 percent rating policy favorably, slightly above the all-time low of 4 percent.

The outlook for vehicle and home purchases remained positive, with eight out of 10 respondents viewing home buying conditions as favorable. But the overall index measuring buying conditions for durable goods fell to 137 from 140.

The overnight session was almost an exclusively positive affair fro US bond markets in relatively light volume and tame volatility. As expected, the Bank of Japan left policy unchanged and the Yen strengthened, further backing away from it's recent double bounce just under 100.00. 10yr Treasuries edged just under 1.7 by the start of the EU session and held mostly sideways through to GDP at 8:30am New York time.

GDP came in at 2.5 vs 3.0 consensus, disappointing enough for another token extension of what now looks to be a range-bound rally. 10's briefly hit 1.674 after the data but have since ebbed to 1.679.

Fannie 3.0 MBS began the day at 104-11, right in line with yesterday's highs and moved as high as 104-17 before peeling back to 104-15 currently--7 ticks up on the day.

The only other scheduled data this morning is Thomson Reuters/University of Michigan Consumer Sentiment at 9:55am, seen coming in with a headline at 73.2 vs a previous 72.3.

The gains in MBS at the moment represent the fruits of a solid week's worth of outperformance. One of the reasons we favor technical analysis that focuses on Treasuries is that MBS are telling a story of "range breaking" this morning whereas 10's--while strong--are clearly and completely stalled at the same old range boundary that's been intact since the last NFP (with the exception of Tuesday's brief breakout test) in the mid 1.67's.

If there's a bullish case to be made there, it's that we're lingering in the 1.67's as opposed to simply seeing a brief pop lower and a retreat back to the more prevalent 1.683 technical level. Even then, at 1.679 currently, a 0.004% gap is splitting hairs in the big picture--something that continues waiting for its best information in the coming week, barring an absolutely ridiculous Consumer Sentiment result.

- Advance Q1 GDP +2.5 vs +3.0 Consensus
- Final Sales +1.5 vs +2.4 Consensus
- Consumer Spending +3.2 vs +1.8 in Q4
- Business Inventory Change +$50.3 bln, adds 1.03% to GDP

- Market Reaction: MBS and Treasuries moderately extending gains. MBS at week's best levels up 7 ticks at 104-15

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.5 percent in the first quarter of 2013 (that is, from the fourth quarter to the first quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 0.4 percent.

The Bureau emphasized that the first-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 3 and "Comparisons of Revisions to GDP" on page 5). The "second" estimate for the first quarter, based on more complete data, will be released on May 30, 2013.

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