MBS MID-DAY: Excessively Moderate Consolidation Continues Ahead of Fed

MBS Pricing Snapshot

More of a "heads-up" than a full blown reprice alert... Fannie 3.5s and 4.0s just hit their lows as the Fed wraps up their scheduled Treasury buying for the day. Yields in Treasuries are on the rise as well. Some lenders who priced just after 10am are already looking at a 4 tick gap (.125) and are thus right on the edge of that special zone where reprice risk starts to develop. If you have loans to lock, it would make sense to watch prices for the next 10-15 minutes (if you aren't already).

- HMI 57 vs 52 forecast, highest since January 2006
- Current Sales Index 60 vs revised 55 in June
- Prospective Buyers Index 45 vs 40 in June
- 6-mo Outlook 67 vs revised 60 in June.

- Market Reaction: bond markets paradoxically stronger.

Builder confidence in the market for newly built, single-family homes rose six points to 57 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) for July, released today. This is the index’s third consecutive monthly gain and its strongest reading since January of 2006.

“Today’s report is particularly encouraging in that it shows improvement in builder confidence across every region as well as solid gains in current sales conditions, traffic of prospective buyers and sales expectations for the next six months,” noted NAHB Chairman Rick Judson, a home builder from Charlotte, N.C. However, he cautioned that “This positive momentum could be disrupted by threats on the policy side, particularly with regard to the mortgage interest deduction and federal support for the housing finance system.”

“Builders are seeing more motivated buyers coming through their doors as the inventory of existing homes for sale continues to tighten,” noted NAHB Chief Economist David Crowe. “Meanwhile, as the infrastructure that supplies home building returns, some previously skyrocketing building material costs have begun to soften.”

- Industrial Production +0.3 vs +0.2 forecast
- Capacity Utilization 77.8 vs 77.7 forecast
- Market Reaction: Limited at best, but initially positive for stocks and negative for bond markets--much more of a factor for stocks than bonds at the moment.

Industrial production increased 0.3 percent in June after having been unchanged in May. For the second quarter as a whole, industrial production moved up at an annual rate of 0.6 percent. In June, manufacturing production rose 0.3 percent following an increase of 0.2 percent in May. The output at mines advanced 0.8 percent in June, while the output of utilities decreased 0.1 percent. At 99.1 percent of its 2007 average, total industrial production was 2.0 percent above its year-earlier level. The rate of capacity utilization for total industry edged up 0.1 percentage point to 77.8 percent, a rate that was 0.1 percentage point above its level of a year earlier but 2.4 percentage points below its long-run (1972–2012) average.

Despite Japan being back in action after a day off yesterday, the Asian hours of the overnight session were, once again, relatively calm and flat for US Treasuries. Also similar to yesterday was the rally into the European session. Weaker data in Germany and the UK helped (ZEW Survey and CPI respectively).

By the time the domestic session got underway, 10yr yields were at their lows of the day and extended those gains just a bit more by 8:11am, hitting 2.515. MBS mirrored the move, with Fannie 4.0s notching up a tick from their already stronger open to 103-26 in Fannie 4.0s.

A stronger than expected Consumer Price Index--out at 8:30am--had a negative effect on bond markets. Given the recent assertion by the Fed that they will defend their inflation targets from both above and below, some market participants look toward persistently low inflation as a potential reason for continued asset purchases. Higher CPI gives bond markets one less reason to expect tapering is delayed (though it's important to note this was far from a watershed event in determining a tapering time-frame--simply another thread in the tapestry).

10yr yields returned to nearly unchanged levels, currently 2.511 while Fannie 4.0s are still 1 tick higher on the session at 100-24. Industrial Production data is next at 9:15am, followed by the NAHB Housing Market Index at 10am.

- CPI +.4801 vs +.3000 Consensus
- Core CPI +0.1612 vs +0.2000 Consensus
- Gasoline accounted for roughly 2/3rd of headline CPI

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.5 percent in June on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.8 percent before seasonal adjustment.

The gasoline index rose sharply in June and accounted for about two thirds of the seasonally adjusted all items change. Other energy indexes were mixed, with the electricity index rising, but the indexes for natural gas and fuel oil declining. The food index increased in June as the index for food at home turned up after declining in May.

The index for all items less food and energy increased 0.2 percent in June, the same increase as in May. Advances in the indexes for shelter, medical care, and apparel accounted for most of the rise, with increases in the indexes for new vehicles and household furnishings and operations also contributing. The indexes for airline fares, used cars and trucks, and recreation all declined in June.

The all items index increased 1.8 percent over the last 12 months, an increase from last month's 1.4 percent figure. The index for all items less food and energy has risen 1.6 percent over the last year, the smallest 12-month change since June 2011. The energy index has risen 3.2 percent over the span, and the food index has increased 1.4 percent.