MBS MID-DAY: Bumpy Morning; Slightly Stronger Ahead of FOMC Minutes

MBS Pricing Snapshot

- October Sales 5.12 mln unit annual rate vs 5.13 forecast
- change of -3.2 pct vs -1.9 pct previously
- Oct prices $199,500 vs 198.5 Sept (209.7 Aug

Market Reaction: Seems like the positive counterattack against this morning's weakness had already run its course before this data hit. MBS and Treasuries have been sideways in a narrow range since then--possibly defining the other side of the pre-FOMC range.

Existing-home sales declined for the second consecutive month in October, while constrained inventory means home prices continue to see double-digit year-over-year gains, according to the National Association of Realtors®.

Total existing-home sales1, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, fell 3.2 percent to a seasonally adjusted annual rate of 5.12 million in October from 5.29 million in September, but are 6.0 percent higher than the 4.83 million-unit level in October 2012. Sales have remained above year-ago levels for the past 28 months.

Lawrence Yun, NAR chief economist, said a flattening trend is expected. “The erosion in buying power is dampening home sales,” he said. “Moreover, low inventory is holding back sales while at the same time pushing up home prices in most of the country. More new home construction is needed to help relieve the inventory pressure and moderate price gains.”

Just a heads up on a fairly quick reversal in this morning's negative momentum. Not only was the post-Retail-Sales weakness surprisingly light, but it's surprisingly "gone" now. 10yr yields are back to overnight levels at 2.723 and Fannie 3.5s are actually in positive territory, up 1 tick at 101-18.

The overnight session was mostly flat after receiving a quick jolt from Bernanke's 7pm speech that resulted in modestly higher yields. 10yr yields were 2.732 at 7:43pm and again at 8:08am, so everything in between doesn't much matter (for those who care, it was boring).

This morning's Retail Sales data was a bigger deal and it beat expectations, rising +0.4 vs +0.1 (excluding autos). Predictably, this resulted in some weakness for bond markets, but it's been refreshingly contained so far. One logical reason for this could be the looming FOMC Minutes at 2pm (markets tend to not want to go too far in one direction or another if a big market mover could soon suggest a different direction).

That's not to say that the weakness couldn't continue from here, simply that it's been well-contained so far. 10yr yields only rose over 2.74 briefly and are currently at 2.734. Fannie 3.5 MBS are only down 3 ticks at 101-14.

Next up is Existing Home Sales at 10am, and then the more important FOMC Minutes at 2pm.

- CPI -0.1 vs 0.0 forecast
- Core CPI +0.1 vs +0.1 forecast

Market Reaction: None

The Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.1 percent in October on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.0 percent before seasonal adjustment.

The gasoline index fell 2.9 percent in October and led to the seasonally adjusted decline in the all items index. Other energy indexes were mixed, with the electricity index rising, but the indexes for fuel oil and for natural gas declining. The food index rose slightly, with major grocery store food group indexes evenly split between advances and declines.

The index for all items less food and energy rose 0.1 percent in October. The shelter index rose, but posted its smallest increase since December 2012. The indexes for airline fares, for recreation, and for used cars and trucks also increased. The medical care index was unchanged, while the indexes for apparel, for household furnishings and operations, and for new vehicles all declined.

- Sales +0.4 vs +0.1 forecast
- Last month revised to 0.0 from -0.1
- excluding autos +0.2 vs +0.1 forecast
- excluding autos/gas/building matererials +0.5 vs +0.3 f'cast
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Market Reaction: Treasuries and MBS heading into weaker territory. 10's up to 2.745 and MBS down 4 ticks to 101-13.

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for October, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $428.1 billion, an increase of 0.4 percent (±0.5%)* from the previous month, and 3.9 percent (±0.7%) above October 2012. Total sales for the August through October 2013 period were up 3.9 percent (±0.5%) from the same period a year ago. The August to September 2013 percent change was revised from -0.1 percent (±0.5%)* to virtually unchanged (±0.3%)*.

Retail trade sales were up 0.3 percent (±0.5%)* from September 2013, and 3.9 percent (±0.7%) above last year. Auto and other motor vehicle dealers were up 11.9 percent (±2.1%) from October of 2012 and nonstore retailers were up 8.2 percent (±2.1%) from last year.