MBS MID-DAY: Weaker After Data, Sideways Ahead of FOMC

MBS Pricing Snapshot

While 10yr yields continue to operate outside the previous relative safety of the supportive ceiling at 2.62, the situation isn't quite as dire as it was immediately following GDP when 10's crested the 2.70 level.

That said, yields are having trouble with what increasingly looks like an ominous resistance level at 2.67. Just as was the case this morning, we're in watch/wait/react mode with respect to the 2pm release of the FOMC Announcement. Markets aren't expecting material changes to the verbiage, but market moving change can't be ruled out.

MBS are off their lows as well but not eager to move directionally higher as 10's hit the proverbial concrete floor. Fannie 4.0s found liquidity (finally) after 9:30am and prices are now down 10 ticks at 103-15. Not bad compared to 8:40am being down more than 16 ticks. Fannie 3.5s are down 14 ticks at 100-07--also much better than the day's low at 99-29.

The fact that this bounce back in prices is occurring right across the rate sheet print times of many lenders makes for a highly uncertain reprice environment between now and 2pm. The best policy is to look at MBS prices during the 15 minutes that preceded the rate sheet print time and watch for changes of more than 4/32nds or .125 bps as early warning signs of negative reprice risk. In general, expect lenders to be more conservative in that positive reprices won't be as freely given if we continue to improve.

- PMI 52.3 vs 54.0 forecast, 51.6 previously
- New Orders 53.9 vs 54.6 previously
- Employment Index 56.6 vs 57.8 previously

- Market Reaction: MBS liquidity starting to come back in Fannie 4.0s, now well off their lows of 103-06 and up to 103-11. 10's are down to 2.677 from 2.705 highs. Waiting on FOMC at 2pm now.



The Chicago Business Barometer increased to 52.3 in July from 51.6 in June, led by gains in Order Backlogs and Supplier Deliveries, more than offsetting a second consecutive monthly decline in both Production and New Orders.

While still in contraction, Order Backlogs rose in July following a record plunge in June but remain below the average seen over the past year. Supplier delivery times moved back above 50 in July having fallen to a four year low in June.

The remaining three Business Activity measures which make up the Barometer fell between June and July. Production and New Orders declined to the lowest since April, while Employment eased slightly, but remained above the long-run average.

Inventories continued to contract and were at their lowest since November 2009. Prices Paid rose for the third consecutive month to the highest since late 2012. Commenting on the MNI Chicago Report, Philip Uglow, Chief Economist at MNI Indicators said: “While the Chicago Business Barometer ticked higher in July, declines in both Production and New Orders show just how challenging the business environment is.”

All reports ending in "DP" have been unfriendly to bond markets so far this morning, with ADP Payrolls firing to the opening volley and GDP continuing the charge. There's nothing too complicated about this morning's price action in bond markets. We'd been waiting on today to inform a break of the 2.62-2.46 range in 10yr yields and that's exactly what's happened.

Not only that, but 2.62's held up eerily well overnight, right up to the ADP data, whereupon yields bolted modestly higher to 2.66's. Stronger-than-expected GDP was good for another modest bolting of 4bps, taking 10's just over 2.7s. Considering these are the highest levels and fastest moves in 3 weeks, this is a very orderly sell-off in Treasuries so far, but not so much for MBS, where liquidity is a big problem.

Fannie 4.0s are probably around 103-06. We say "probably" because who really knows? The bid/ask are so far apart and trading is so very very VERY sparse that actually saying that MBS are at a certain price is highly dependent on what someone is willing to buy or sell for, and neither buyers or sellers appear interested in meeting each other half-way at the moment.

If there's any consolation, it's that the bleeding may have stopped for now, with the 2.70 mark currently looking like a ceiling in 10's. Yields have ebbed back to 2.67's and volume is beginning to subside. While this is no guarantee that things continue to move in the same direction, it's better than a sharp stick in the eye (or another break above 2.70, whichever you find more disconcerting).

-GDP +1.7 vs +1.0 forecast
- Final sales +1.3 pct vs +0.8 pct
- Core PCE Prices +0.8 vs +1.1 forecast

Market Reaction: More selling in bond markets. 10's hit 2.702 at their highest, but are back down to 2.685 (could just be catching their breath). MBS have added another 4-6 ticks of losses.

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 1.7 percent in the second quarter of 2013 (that is, from the first quarter to the second quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 1.1 percent (revised).

The Bureau emphasized that the second-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency. The "second" estimate for the second quarter, based on more complete data, will be released on August 29, 2013.

The increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, nonresidential fixed investment, private inventory investment, and residential investment that were partly offset by a negative contribution from federal government spending. Imports, which are a subtraction in the calculation of GDP, increased.

Whatever could have been said about the overnight and early morning trading activity is no longer relevant as the ADP data trumps all comers in terms of volume and movement. Interestingly enough, 10's did a great job of holding recent ceilings in the 2.62's before the data but have moved higher after a stronger-than-expected print.

While the payrolls data only beat by 20k (200k vs 180k), the previous print was revised up to 198k from 188k. Of course, that revision is no big deal in that it's close enough to original print, but the point is that we've been waiting to confirm that NFP data will stay in line with recent trends before fully freaking out about tapering and this ADP data is the first, best, highest probability means we have of confirming that until we get to NFP itself on Friday. As such, bond markets are freaking out a bit. 10's are up in the 2.66's and Fannie 4.0s are down 11 ticks to 103-12. Liquidity is a mess in MBS right now, so pinning down actual price levels is more of a guessing game. Things get bumpy from here on out, especially if GDP beats.

- Private Payrolls +200k vs +180k forecast
- Previous month revise from 188k to 190k

- Market Reaction: Bond markets selling off and liquidity breaking down in MBS. 10's are up to 2.67-ish and Fannie 3.5s and 4.0s are both down three eighths of a point to half a point.

Private-sector employment increased by 200,000 jobs from June to July, according to the July ADP National Employment Report®. Broadly distributed to the public each month, free of charge, the ADP National Employment Report is produced by ADP®, a leading provider of human capital management solutions, in collaboration with Moody’s Analytics. The report is derived from ADP’s actual payroll data and measures the change in total nonfarm private employment each month on a seasonally-adjusted basis. June’s job gain was revised upward from 188,000 to 198,000.