MBS MID-DAY: Calmly Holding Gains; Unofficial Early Close

MBS Pricing Snapshot

- Headline Sentiment 82.1 vs 80.5 forecast - Lowest "final" reading since April
- Current Conditions 95.2 vs 91.0 forecast
- Expectations 73.7 vs 72.9 forecast
- 5-yr Inflation expectations 2.9 vs 2.8 previously
- Market Reaction: First move is weaker for bond markets, but it could be more convincing. 10's haven't broken their overnight high yields. MBS are thinking about hanging in at their lows. The major "counterpoint" in the report is that it's the lowest final reading since April, so while it beat estimates, those estimates were lower than previous readings. That plus the potential month-end buying support mean the show's not quite over.

- PMI 53.0 vs 53.0
- New Orders 57.2 vs 53.9 previously
- Prices paid 65.2 vs 63.6 previously
- Employment 54.9 vs 56.6 previously

-Market Reaction: Bond markets off their best levels of the morning. Waiting on Consumer Sentiment.

The Chicago Business BarometerTM 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 BarometerTM ticked higher in July, declines in both Production and New Orders show just how challenging the business environment is.”

With the first piece of economic data out of the way, bond markets are just slightly into positive territory. The overnight session was exceptionally flat until 7am, though opened slightly weaker in Asia. Decent data late in the European session sent Bund yields moderately higher with Treasuries giving a bit of chase.

Treasuries have disconnected in a good way since then, falling back below the low yields of the session and retesting them currently. This has been a friendly environment for MBS, which opened in line with yesterday's close and have gained a few ticks since then.

The next data hits at 9:45am with Chicago PMI (though this can sometimes hit at 9:42am in the form of an early market reaction if the data deviates much from consensus (some traders get it 3 minutes early). Consumer Sentiment follows 10 minutes later.

Both of these are relevant reports--more so than Incomes and Outlays earlier this morning--but unless they cause big moves weaker for bonds, we're hoping for month-end index buying to provide a supportive enough undertone to get us into the 3-day weekend with minimal damage. So far so good, but we'll reassess after data.

- Spending +0.1 vs +0.3 forecast, +0.6 previously
- Income +0.1 vs +0.2 forecast, +0.3 previously
- Core PCE Prices +0.1 vs +0.2 forecast

Market Reaction: none. There was a brief spat of small improvement followed by modest weakness and we're currently back to pre-data levels across the board.

Personal income increased $14.1 billion, or 0.1 percent, and disposable personal income (DPI) increased $21.7 billion, or 0.2 percent, in July, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $16.3 billion, or 0.1 percent. In June, personal income increased $38.2 billion, or 0.3 percent, DPI increased $27.3 billion, or 0.2 percent, and PCE increased $64.0 billion, or 0.6 percent, based on revised estimates.

Real disposable income increased 0.1 percent in July, in contrast to a decrease of 0.2 percent in June. Real PCE increased less than 0.1 percent, compared with an increase of 0.2 percent.