MBS MID-DAY: Mostly Holding Gains Despite Increased Volatility

MBS Pricing Snapshot

Near the end of what had been a lackadaisical overnight session, Treasuries improved significantly on the announcement of an ECB rate cut. This was a possibility, but not the consensus. 10yr yields improved more than 3pms instantly (2.64+ to 2.602).

The ECB Announcement was at 7:45am. MBS opened 3-4 ticks higher 15 minutes later and made further gains ahead of the 8:30am data. At their best, Fannie 3.5s were up to 102-02.

The stronger-than-expected GDP sent bond markets heading in the other direction, though that process took longer than it otherwise might due to the ongoing press conference with ECB's Draghi, not to mention the debatable strength of the GDP data itself (because consumer spending was weaker despite the big beat in the headline).

At the moment, MBS and Treasuries are both backed to unchanged--101-27 and 2.6348 respectively.

- Claims 336k vs 335k forecast, 345k previously
- Continued Claims 2.868 mln vs 2.875 mln forecast
- Market Reaction: with a slight upward revision to last week and the today's report falling almost perfectly in line with the consensus, it's at the very least not creating additional weakness for bond markets. The focus is more appropriately on GDP.

In the week ending November 2, the advance figure for seasonally adjusted initial claims was 336,000, a decrease of 9,000 from the previous week's revised figure of 345,000. The 4-week moving average was 348,250, a decrease of 9,250 from the previous week's revised average of 357,500.

The advance seasonally adjusted insured unemployment rate was 2.2 percent for the week ending October 26, unchanged from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending October 26 was 2,868,000, an increase of 4,000 from the preceding week's revised level of 2,864,000. The 4-week moving average was 2,866,000, a decrease of 8,500 from the preceding week's revised average of 2,874,500.

- GDP +2.8 vs +2.0 forecast, highest since Q3 2012
- Consumer Spending +1.5 vs +1.8 previously
- Business Inventory Change +86 bln vs 56.6 bln previously
- Inventory Change ads .83 percent to GDP

- Market Reaction: Bond markets have weakened on the news, but far FAR less than we would have expected given the size of the beat. That said, the internal components of the report make it a bit more palatable for bond markets in that the consumer spending component declined to 1.5 pct from 1.8 pct in Q2. Business inventories were also a bit high, and not as economically positive as Consumer Spending. 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 2.8 percent in the third quarter of 2013 (that is, from the second quarter to the third quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 2.5 percent.

The Bureau emphasized that the third-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency (see the box on page 3 and "Comparisons of Revisions to GDP" on page 4). The "second" estimate for the third quarter, based on more complete data, will be released on December 5, 2013.

The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, exports, residential fixed investment, nonresidential fixed investment, and state and local government spending 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 growth in the third quarter primarily reflected a deceleration in imports and accelerations in private inventory investment and in state and local government spending that were partly offset by decelerations in exports, in nonresidential fixed investment, and in PCE.

The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 1.8 percent in the third quarter, compared with an increase of 0.2 percent in the second. Excluding food and energy prices, the price index for gross domestic purchases increased 1.5 percent in the third quarter, compared with an increase of 0.8 percent in the second.