MBS MID-DAY: Bond Markets Reluctantly Accept Boost From Retail Sales

MBS Pricing Snapshot

- May Inventories +0.1 vs +0.4 consensus

- Market Reaction: the only relevance of this data is for economists/analysts adjusting their GDP tracking. In this sense, the lower inventories suggest a modest reduction in Q2 GDP. The report itself is from May, so doesn't have an immediate implication on the current economic situation and not much of a longer term implication at all. At best, this data doesn't stand in the way of preexisting trends, though that doesn't mean it won't coincide with a bounce that's sometimes seen if bonds are rallying into the 10am hour. If we see such a bounce, it would be for technical and tradeflow-based reasons though.

The U.S. Census Bureau announced today that the combined value of distributive trade sales and manufacturers’ shipments for May, adjusted for seasonal and trading-day differences but not for price changes, was estimated at $1,283.5 billion, up 1.1 percent (±0.2) from April 2013, and were up 3.1 percent (±1.1) from May 2012.

Manufacturers’ and trade inventories, adjusted for seasonal variations but not for price changes, were estimated at an end-of-month level of $1,656.5 billion, up 0.1 percent (±0.1)* from April 2013 and up 3.8 percent (±1.4) from May 2012.

The total business inventories/sales ratio based on seasonally adjusted data at the end of May was 1.29. The May 2012 ratio was 1.28.

The overnight session wasn't meaningful for US Treasuries in any way, shape, or form. China's GDP coming in close to expectations (7.5 vs 7.7) did nothing to harm US bond markets though equities futures got a bit of a lift. Volumes were low Japan out on holiday and cash Treasuries didn't begin trading until European hours (during which, they were completely flat.

The only discernible movement came right as domestic traders sat down, as 10yr yields rose from a tight range around 2.6 to 2.637 in fairly short order. Weaker-than-expected Retail Sales completely erased the weakness in bond markets, taking both Treasuries and MBS back into positive territory.

10's are currently down 1.72 bps on the day at 2.576 and MBS are 3 ticks better in Fannie 4.0s at 103-11.

Business Inventories at 10am is the only remaining economic data, but it's in the same league as Retail Sales in terms of market-moving potential. Bigger picture, bond markets have been sideways since Wednesday, in a tight range from 2.53 to 2.63 in 10's. MBS have been in a similarly narrow range relative to previous volatility.

- Empire State Index +9.46 vs +5.0 consensus
- Employment Index +3.26 vs 0.00
- Market Reaction: While weaker-than-expected numbers might have helped further facilitate a bounce back against this morning's weakness, these stronger numbers are wholly overshadowed by weakness in the Retail Sales numbers out at the same time.

The July 2013 Empire State Manufacturing Survey indicates that conditions for New York manufacturers continued to improve modestly. The general business conditions index rose two points to 9.5. The new orders index rose ten points to 3.8, and the shipments index climbed twenty-one points to 9.0. The prices paid index fell four points to 17.4, pointing to a slower pace of input price increases, while the prices received index fell to 1.1, suggesting that selling prices were little changed. Employment indexes were mixed, and indicated little positive momentum in the labor market. The index for number of employees inched up to 3.3, while the average workweek index remained negative at -7.6. Indexes for the six-month outlook were generally higher—a sign that optimism about future business conditions had strengthened.

- Retail Sales +0.4 pct vs +0.8 consensus
- Excluding Autos +0.0 vs +0.4 consensus

- Market Reaction: Instant gains for Treasuries and MBS, essentially unwinding the damage done since 7:30am. 10yr yields back under 2.6.

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for June, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $422.8 billion, an increase of 0.4 percent (±0.5%)* from the previous month, and 5.7 percent (±0.7%) above June 2012. Total sales for the April through June 2013 period were up 4.6 percent (±0.5%) from the same period a year ago. The April to May 2013 percent change was revised from +0.6 percent (±0.5%) to +0.5 percent (±0.4%).

Retail trade sales were up 0.6 percent (±0.5%) from May 2013 and 6.0 percent (±0.7%) above last year. Nonstore retailers were up 13.8 percent (±2.1%) from June 2012 and auto and other motor vehicle dealers were up 12.9 percent (±2.1%) from last year.