MBS MID-DAY: Once Again, Stronger Start, Weaker Into Noon Hour

MBS Pricing Snapshot

The Thomson Reuters/University of Michigan Consumer Sentiment Index came in at 83.9 in July's first reading. This was slightly lower than the 85.0 expected by economists surveyed by Reuters, but relatively in line with June's final reading of 84.1.

Consumers were most upbeat about their present situation with the "current conditions" index (one of the reports internal components) rising to 99.7, the highest since July 2007. Expectations called for 94.0.

Other internals painted a different picture with the expectations component falling to 73.8 from 77.8 previously. This was the lowest since April of 2013. Inflation expectations were also higher with the 1yr outlook rising to 3.3 percent from 3.0 percent in June.

Consumer Sentiment is a moderately important report that can certainly have a market moving impact. In cases where the headline (that's the main "consumer sentiment index") is close to estimates, the "internals" (all the sub-indexes) become relatively more important. In this case the large gains in current conditions are offset by softness elsewhere. For bond markets, the impact has been muted so far.

Treasuries drifted mostly lower in yield overnight, catching a majority of their benefit from the European session. 10's were as low as 2.53 before domestic traders began getting involved for the day, reversing the moderate momentum.

Treasuries hit the domestic open at 2.54, rose over 2.56 after higher than expected inflation in the Producer Price Index but are back to 2.544 in fairly short order. Given the recent resurgence of inflation rhetoric--especially the Fed's focus on defending the inflation target from above AND below as potential justification for ongoing QE--this is understandably one of the first instances where we've seen PPI have this much of an effect in more than 2 years. That said, most of the weakness was in before the report hit, and most of it is out again.

MBS opened several ticks in the green and Fannie 4.0s remain 5 ticks up on the day at 103-13. Charts won't look it though, as the "roll" was last night (prices on the right side of the chart are August coupons and left side are the now retired July coupons). Both Treasuries and MBS look as if they've been able to scrape together some support, and we'll turn to waiting for Consumer Sentiment at 9:55am unless the existing range is broken before then.

- PPI +0.8 vs +0.5 Consensus
- Largest rise since September
- Core PPI +0.2 vs +0.1 consensus
- year-over-year +2.5 vs +2.1, Core +1.7 vs +1.6
- Most of rise due to energy prices -BLS


The Producer Price Index for finished goods increased 0.8 percent in June, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. Prices for finished goods rose 0.5 percent in May and fell 0.7 percent in April. At the earlier stages of processing, prices received by manufacturers of intermediate goods advanced 0.5 percent in June, and the crude goods index was unchanged. On an unadjusted basis, prices for finished goods moved up 2.5 percent for the 12 months ended June 2013, the largest 12-month rise since a 2.8-percent increase in March 2012.