MBS MID-DAY: Big Nasty Sell-Off. Widespread Reprices

MBS Pricing Snapshot

- Sentiment 80.0 vs 85.5 Forecast
- Current Conditions 91 vs 98
- Expectations 72.9 vs 76.0
- 12-mo Outlook 92 vs 104
- Sentiment and Expectations Lowest Since April

Market Reaction: a few ticks of positivity at first, and we're far from finding out where the day will end, but so far, markets are trading it like it's not quite enough weakness to suggest pushing back QE tapering expectations--especially from a report with no employment metrics. That said, we're not losing ground either.

(Reuters) - U.S. consumers, bracing for higher interest rates and slightly slower economic growth, were a bit less optimistic in August as sentiment retreated from last month's six-year high, a survey released on Friday showed. The Thomson Reuters/University of Michigan's preliminary reading on the overall index on consumer sentiment slipped to 80.0 from 85.1 in July, the highest since July 2007. August's result was well below the 85.5 reading expected by economists.

Consumers' view of current economic conditions showed the biggest decline, and most expected the pace of growth to ease slightly. However, these changes were not large enough to upend "the prevailing view that the economic expansion will continue," survey director Richard Curtin said in a statement.

"Perhaps the most important recent changes have been the increase in home values as well as the jump in the numbers that expect interest rate increases during the year ahead," he added.

Long-term interest rates have risen by more than a full percentage point over the last three months on the view that the Federal Reserve will start scaling back as soon as next month its hefty support for the economy.

That has pushed up mortgage rates, which could sap some of the strength from a housing recovery that has been pushing prices higher for more than a year.

The general level of indecision is palpable in bond markets--assuming you take yesterday's decision to head into newer, significantly weaker territory 'as read.' Treasury yields rose from the mid 2.76's to 2.80 in the overnight session, but were very clear in their resolve to go no higher. As they recovered into European hours, they were also very clear to go no lower than mid 2.76's, even though German Bunds were suggesting a bit more positivity.

Yields rose again into domestic hours ahead of the Housing Starts data, but AGAIN went no higher than overnight highs. Following the lukewarm data, they've been moving gradually back down to the other side of the overnight range. At this point it's either tradeflows at the 9:30am stock open or the 9:55am Consumer Sentiment data that will cast the vote on this micro-range (though even if stocks do it at 9:30, Sentiment still has the option to do it at 9:55).

MBS began the day in slightly weaker territory and, like Treasuries, have moved back close to unchanged levels. Again, the indecision is palpable. The choice is whether or not to hold the range ahead of next week's FOMC Minutes. The answer is very likely "yes" unless data clearly suggests another acceleration in the weakness. To be clear, "the range" is the upwardly sloped, but still slightly sideways medium term trend channel in 10yr yields seen in this morning's Day Ahead.

- Productivity +0.9 vs 0.6 forecast
- Labor Costs +1.4 vs +1.2 forecast
- Market Reaction: None. Not a market mover, but it's "scheduled economic data," so here it is:

Nonfarm business sector labor productivity increased at a 0.9 percent annual rate during the second quarter of 2013, the U.S. Bureau of Labor Statistics reported today. The increase in productivity reflects increases of 2.6 percent in output and 1.7 percent in hours worked. (All quarterly percent changes in this release are seasonally adjusted annual rates.) From the second quarter of 2012 to the second quarter of 2013, productivity was unchanged as output and hours worked both increased 1.8 percent.

Labor productivity, or output per hour, is calculated by dividing an index of real output by an index of hours worked of all persons, including employees, proprietors, and unpaid family workers.

Unit labor costs in nonfarm businesses increased 1.4 percent in the second quarter of 2013, the combined effect of a 2.3 percent increase in hourly compensation and the 0.9 percent increase in productivity. Over the last four quarters hourly compensation and unit labor costs both increased 1.6 percent.

BLS defines unit labor costs as the ratio of hourly compensation to labor productivity; increases in hourly compensation tend to increase unit labor costs and increases in output per hour tend to reduce them.

- Starts 896k vs 900k Forecast
- Permits 943k vs 945k Forecast
- Single Fam Starts 591k vs 604k previously
- Multi Fam 305k vs 242k

Market Reaction: A few ticks of improvement but no sustained momentum.



Privately-owned housing units authorized by building permits in July were at a seasonally adjusted annual rate of 943,000. This is 2.7 percent (±0.8%) above the revised June rate of 918,000 and is 12.4 percent (±1.3%) above the July 2012 estimate of 839,000.

Single-family authorizations in July were at a rate of 613,000; this is 1.9 percent (±0.9%) below the revised June figure of 625,000. Authorizations of units in buildings with five units or more were at a rate of 303,000 in July.

Privately-owned housing starts in July were at a seasonally adjusted annual rate of 896,000. This is 5.9 percent (±14.5%)* above the revised June estimate of 846,000 and is 20.9 percent (±12.9%) above the July 2012 rate of 741,000.

Single-family housing starts in July were at a rate of 591,000; this is 2.2 percent (±9.7%)* below the revised June figure of 604,000. The July rate for units in buildings with five units or more was 290,000.

Single-family housing completions in July were at a rate of 571,000; this is 5.9 percent (±10.2%)* above the revised June rate of 539,000. The July rate for units in buildings with five units or more was 195,000.