MBS MID-DAY: Off Morning Lows, But Struggling With Highs

MBS Pricing Snapshot

- Inventories +0.0 vs +0.3 forecast
- Sales -1.1 vs +1.0 in Feb, biggest drop since June 2012
Market Reaction: Nothing for bond markets. Stocks blipped just lower than opening levels, but have already bounced back.

The U.S. Census Bureau announced today that the combined value of distributive trade sales and manufacturers’ shipments for March, adjusted for seasonal and trading-day differences but not for price changes, was estimated at $1,269.6 billion, down 1.1 percent (±0.1) from February 2013 and up 1.8 percent (±0.3) from March 2012.

Manufacturers’ and trade inventories, adjusted for seasonal variations but not for price changes, were estimated at an end-of-month level of $1,640.9 billion, virtually unchanged (±0.1)* from February 2013 and up 4.5 percent (±0.5) from March 2012.

The total business inventories/sales ratio based on seasonally adjusted data at the end of March was 1.29. The March 2012 ratio was 1.26.

After hitting 1.922 on Friday, 10yr yields began 'honing in' on 1.90, bouncing back and forth across the anticipated inflection point as if by design. 103-05 was the analogous center-of-gravity for MBS with prices orbiting in decreasing magnitude into the close.

Treasuries kicked off the overnight session appreciably weaker hitting 1.94 right out of the gate as Japanese markets traded "risk-on" (stock prices and bond yields higher). The European hours brought some relief, but only enough to get 10's back down to Friday's 1.90 pivot zone before early domestic trading blocked further progress ahead of Retail Sales.

The report came out stronger than expected, with the primary drag being gasoline sales. This was expected to be the case, but not quite to the extent seen. Notably, headline sales were able to turn positive (+0.1) whereas markets had baked in a negative headline (-0.3).

Bond markets moved back into weaker territory after the report, ominously reinforcing 1.90 as a resistance level (in other words, 1.90% was keeping it's options open heading into Friday's close, threatened to become a "floor" as yields moved higher overnight and now pours another layer of cement after stronger data. It's not a floor in the sense that we should EXPECT yields to bounce when/if they return, but it would simply "mean something" if broken. The more we bounce there, the more it means. Given what we've seen so far, the current significance would be moderate-to-high, but better technical lines-in-the-sand could emerge before then).

10's are currently hovering between 1.93-1.94, but have struggled to move much higher. MBS prices moved down to 103-25 and are experiencing similar support there. Equities futures aren't yet back to Friday's closing levels but are at overnight highs ahead of the cash open at 9:30am.

There's no more top tier data this morning, but Business Inventories are out at 10am, expected to rise 0.3 pct.

- Sales +0.1 vs -0.3 forecast, -0.5 in March
- Excluding Autos -0.1, as expected
- Excluding Gasoline +0.6 vs 0.0 previously
- Gasoline -4.7 pct, most since Dec 2008
- Market reaction: further selling for bond markets, but seeing hesitation moving through overnight lows. Muted reaction in equities.

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for April, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $419.0 billion, an increase of 0.1 percent (±0.3%)* from the previous month, and 3.7 percent (±0.7%) above April 2012. Total sales for the February through April 2013 period were up 3.7 percent (±0.5%) from the same period a year ago. The February to March 2013 percent change was revised from -0.4 percent (±0.5%)* to -0.5 percent (±0.2%).

Retail trade sales were virtually unchanged (±0.5%)* from March 2013 and 3.6 percent (±0.7%) above last year. Nonstore retailers were up 15.4 percent (±2.0) from April 2012 and auto and other motor vehicle dealers were up 8.8 percent (±2.0) from last year.