MBS MID-DAY: Slightly Weaker After Data; Auction Coming up

MBS Pricing Snapshot

MBS began the morning in roughly similar territory to yesterday's latest levels. That followed an overnight session in Treasuries that was largely uneventful with highs and lows falling inside yesterday's range.

Selling began well before data, with Treasury yields moving higher from 6am. When the data arrived, stronger-than-expected Jobless Claims were the primary motivator to continue the selling trend. GDP was close enough to consensus to be read either way as far as short term trading motivations are concerned.

There are two potential silver linings to the weakness:

1. It has, thus far, affected Treasuries more than MBS. 10yr yields are more than halfway back to yesterday's highs whereas MBS prices are noticeably less than halfway back to yesterday's lows.

2. The overall magnitude of selling has been fairly minimal (even Treasuries remained contained inside yesterday's range) and may already be showing signs of support (bouncy ceiling potential at 2.656%).

Pending Home Sales at 10am is less relevant in terms of data but could have a slight impact. After that, auction-related flows will contribute to the afternoon momentum.

- GDP +2.5 vs +2.6 Forecast, +2.5 Previously
- Few internal components were meaningfully changed
- Core PCE +0.6 vs +0.8 Forecast, smallest gain since Q209
- Market Reaction: Reacting more to Jobless Claims.

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 2.5 percent in the second quarter of 2013 (that is, from the first quarter to the second quarter), according to the "third" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 1.1 percent.

The GDP estimate released today is based on more complete source data than were available for the "second" estimate issued last month. In the second estimate, the increase in real GDP was also 2.5 percent. With the third estimate for the second quarter, the general picture of economic growth remains largely the same.

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 fixed investment that were partly offset by a negative contribution from federal government spending. Imports, which are a subtraction in the calculation of GDP, increased.

The acceleration in real GDP in the second quarter primarily reflected upturns in exports and in nonresidential fixed investment, a smaller decrease in federal government spending, and an upturn in state and local government spending that were partly offset by an acceleration in imports and decelerations in private inventory investment and in PCE.

- Claims fell to 305k vs 325k Forecast
- Previous week revised to 310k from 309k
- Past two claims reports have had "explanations" from the Labor Department as to why they were so low. This one says those temporary factors (backlogs in 2 states due to computer upgrades) are no longer a factor, so the headline 305k is ostensibly real. Markets reacting accordingly. MBS and Treasuries slightly weaker.

In the week ending September 21, the advance figure for seasonally adjusted initial claims was 305,000, a decrease of 5,000 from the previous week's revised figure of 310,000. The 4-week moving average was 308,000, a decrease of 7,000 from the previous week's revised average of 315,000.

The advance seasonally adjusted insured unemployment rate was 2.2 percent for the week ending September 14, an increase of 0.1 percentage point from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending September 14 was 2,823,000, an increase of 35,000 from the preceding week's revised level of 2,788,000. The 4-week moving average was 2,842,500, a decrease of 42,750 from the preceding week's revised average of 2,885,250.