MBS MID-DAY: Leveling Off After Hitting Resistance

MBS Pricing Snapshot

While the headline index of the Consumer Sentiment report came in at 82.7, weaker than the expected 84.5, the relatively important "expectations" component rose from 75.8 to 76.7, it's highest level since November. Move out further, and expectations improved more, with the 12-month outlook rising from 100 to 102.

This isn't enough to offset the other weak components in the report, but it highlights the effects of "current conditions" as the primary detractor at 92.1 vs 98.0 last time (consensus 96.0 today).

Consumer inflation expectations were also slightly higher, rising 0.1 in both 1 and 5yr time frames. That doesn't do much to help or hurt, but it's not bond-market positive, at least. That said, the report as a whole is even more clearly "not negative" for bond markets, which is turning out to be just as good as positive news at the moment.

Given the hullabaloo caused by yesterday's Hilsenrath article, Treasuries kicked off the overnight session trading almost perfectly flat until European hours. The same was true for equities futures (though those remained perfectly flat all night (ok, so 3 points range in S&P).

This isn't much of a surprise considering the thrust of the article was to edify that which is already known: the Fed isn't raising short term borrowing rates any time soon. This was perhaps the biggest "no duh" of any headline that 's ever caused a lightning quick 4bp rally in Treasuries, or at least that would have been a safe assumption considering the fact that tapering has nothing to do with the Fed Funds Rate, the latter being tied to thresholds mentioned in the policy text and not seen changing until 2014 or 2015 according to Fed forecasts.

But if you click through the various Treasury charts on the dashboard, you'll see that shorter maturities clearly had the more pronounced reaction to the story, indicating that markets actually didn't simply mistake the headline for a comment on tapering prospects (again, tapering ≠ rate hikes). Further evidence that tapering wasn't inferred came courtesy of Yen trading levels which kept on truckin' higher (weaker) yesterday afternoon and didn't trade stronger until Asian markets opened--even then never moving past levels seen before the Hilsenrath article.

So the reaction in Treasuries remains a bit confusing. More appropriately, it's downright alarming that it had any effect on Fed Funds Rate expectations (which have been under no threat, relative to asset purchases)--tacitly suggesting markets are having a hard time distinguishing the two decidedly discreet components of "accommodative policy." There's low rate accommodation and asset purchase accommodation. One of these things is not like the other, but apparently that's news to market participants, and that has scary implications for volatility.

Value judgments are moot, however. Treasuries may have traded sideways during Asian hours, but stocks are in line with pre-Hilsenrath levels. Markets have spoken, and that correlation along with Japan's reaction tells us the "low rates" issue was actually an issue. 10yr yields improved as money flowed into both sides of the market in European hours, before flattening out heading into domestic hours.

That's afforded and MBS open just a few ticks higher than yesterday's close, and a measured rally higher since then. Fannie 3.5s are up 9 ticks at 103-22 now--their best levels of the week. 10's are at their lows of the week as well, down 2.7 bps at 2.124. Equities are consolidating a choppy narrow range just under yesterday's closing levels, and we find ourselves waiting for Consumer Sentiment data as the ostensible gateway drug to a more hardcore retracement in bond markets (previous range centers on 2.10 in 10's and has resistance at 2.07). We'd need an awesomely bad sentiment reading for such things though.

- PPI +0.5 vs +0.1 consensus, -0.7 previously
- CORE PPI + 0.1 vs +0.1 cons, +0.1 prev.
- Annual Core +1.7 vs +1.7 previously

The Producer Price Index for finished goods rose 0.5 percent in May, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. Prices for finished goods fell 0.7 percent in April and 0.6 percent in March. At the earlier stages of processing, prices received by manufacturers of intermediate goods declined 0.1 percent in May, and the crude goods index advanced 2.2 percent. On an unadjusted basis, prices for finished goods moved up 1.7 percent for the 12 months ended May 2013.

- Trade Gap $106.1 bln vs $109.7 bln forecast

The U.S. current-account deficit—the combined balances on trade in goods and services, income, and net unilateral current transfers—increased to $106.1 billion (preliminary) in the first quarter of 2013 from $102.3 billion (revised) in the fourth quarter of 2012. The increase in the current-account deficit was accounted for by a decrease in the surplus on income and an increase in outflows of net unilateral current transfers, such as government grants, government pensions, and private remittances. These changes were partly offset by a decrease in the deficit on goods and an increase in the surplus on services.