MBS MID-DAY: Weaker After Morning Data, but MBS Outperforming

By: Matthew Graham
MBS Live: MBS Morning Market Summary
The Jobless Claims is one of the cornerstones of the economic data environment.  It prints every week, same time, dame day.  It's relatively easy to understand in that it's simply a tally of those filing for first time unemployment benefits from the previous week, and it's had a decent track record of acting as a market mover.  All those facts belie the current phenomenon where the Claims data is mostly disregarded by market participants.  This is partly a normal change as we head into the end of the year, but the series has also suffered other recent setbacks surrounding the government shutdown and other volatility-inducing state-specific issues (like computer upgrades in California that threw the numbers off for several weeks.

While the report is seasonally adjusted, by the Labor Department's own admission, that seasonal adjustment process hasn't been working as intended.  Just last week, they noted that the exceptionally low Initial Claims reading was distorted due to a suboptimal application of seasonal adjustment factors.  So although it's supposed to be a good representation of trend, it hasn't been.  In fact, it's been all over the board, and thus not having nearly as much impact as normal.

This morning, traders chose to favor the Retail Sales numbers, which were stronger than expected.  Along with the stronger Business Inventories data at 10am, this provided reason for many trade desks to adjust their GDP tracking slightly higher, which in turn has a negative implication for bond markets.  That continues to play out for Treasuries, though the losses have moderated ahead of the 30yr bond auction.  To reiterate the point from this morning's commentary, markets seem content to hunker down in a tight range around current levels heading into next week's FOMC Announcement. 
MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.
FNMA 3.0
95-05 : -0-03
FNMA 3.5
99-19 : -0-02
FNMA 4.0
103-08 : -0-03
FNMA 4.5
106-06 : +0-02
GNMA 3.0
96-13 : -0-01
GNMA 3.5
100-28 : -0-01
GNMA 4.0
104-05 : -0-01
GNMA 4.5
106-24 : -0-02
FHLMC 3.0
94-26 : -0-02
FHLMC 3.5
99-13 : -0-02
FHLMC 4.0
103-00 : -0-03
FHLMC 4.5
105-31 : -0-02
Pricing as of 11:05 AM EST
Morning Reprice Alerts and Updates
Below is a recap of instant Reprice Alerts and updates issued via email and text alert to MBS Live subscribers this morning.

10:36AM  :  ALERT ISSUED: Negative Reprice Risk Already, but not Full-Blown
Fannie 4.0s are down from 103-11 to 103-07, enough to consider ourselves at the early edge of negative reprice risk for lenders who put out rates before 10:15am (roughly). The rate sheet print time is a bit of a moving target because we're not privy to the lag time between taking down marks and rate sheets hitting your inbox or pricing systems, but assume it's not instantaneous and know that prices were mostly intact through 9:58am.

10yr yields are up to 2.88, which is a potential support level. The Business Inventories data at 10am coincides with the move but isn't the source of it. As it stands, there isn't one specific source. Tradeflows were already in the process of reversing around 9:45am, and volume remains quite low.

As of right this moment, MBS are holding their ground at the lows of the day, so we'd emphasize that many lenders will wait for more weakness before repricing, but a few of them may be considering one if we don't bounce more convincingly.
9:16AM  :  Weaker After Data but Trying to Bounce Now
Bond markets were dead quiet overnight, both in terms of volume and volatility. 10yr yields crossed the 8am starting line right where they finished yesterday's race but then began moving slightly higher ahead of the morning's economic data.

After the stronger-than-expected Retail Sales report, both MBS and Treasuries sold-off at a medium pace. 10's crested 2.87 (vs 2.85 opening levels) and Fannie 4.0s dropped from 103-11 to 103-06. The move ignored the volatile swing in Jobless Claims.

Selling momentum stalled at 5:45am and has reversed to somewhat positive effect. Fannie 4.0s are back up to 103-10, 1 tick lower on the day. Treasuries haven't clawed back quite as much but are still better off than their post data highs--currently just over 2.86.

The morning's next data--Business Inventories at 10am--is a 3rd tier market mover at best. The focus for the rest of the day is more appropriately placed on the 30yr Bond Auction. Although details are released at 1pm, it can affect trading beforehand. In general, bond markets are more conservative ahead of a Thursday Treasury auction, provided the auction is close to expectations.
8:55AM  :  ECON: Jobless Claims Much Higher Than Expected, but with a Catch
- Claims 368k vs 320k forecast, 300k previously
- 4-wk avg 328,750 vs 322,750 previously
- Continued Claims 2.791 vs 2.75 million forecast
- Market Reaction: largely discounted due to the fact that claims have been horribly inconsistent into the end of the year between the government shutdown and holidays. Market participants don't read as much into these bigger deviations as the deviations would seem to suggest.

In the week ending December 7, the advance figure for seasonally adjusted initial claims was 368,000, an increase of 68,000 from the previous week's revised figure of 300,000. The 4-week moving average was 328,750, an increase of 6,000 from the previous week's revised average of 322,750. The advance seasonally adjusted insured unemployment rate was 2.1 percent for the week ending November 30, unchanged from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending November 30 was 2,791,000, an increase of 40,000 from the preceding week's revised level of 2,751,000. The 4-week moving average was 2,793,500, a decrease of 4,750 from the preceding week's revised average of 2,798,250.
8:44AM  :  ECON: Retail Sales Stronger Than Expected
- Sales +0.7 vs +0.6 forecast, biggest rise since June
- Excluding Autos +0.4 vs +0.2 forecast
- Market Reaction: Bond markets weaker on this headline as Claims data (which was weaker) is easier to discount due to the holiday schedule causing more issues for the weekly report (whereas Sales is monthly).

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for November, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $432.3 billion, an increase of 0.7 percent (±0.5%) from the previous month, and 4.7 percent (±0.7%) above November 2012. Total sales for the September through November 2013 period were up 4.1 percent (±0.5%) from the same period a year ago. The September to October 2013 percent change was revised from +0.4 percent (±0.5%)* to +0.6 percent (±0.3%).

Retail trade sales were up 0.6 percent (±0.5%) from October 2013, and 4.6 percent (±0.7%) above last year. Auto and other motor vehicle dealers were up 10.9 percent (±2.1%) from November of 2012 and nonstore retailers were up 9.4 percent (±2.1%) from last year.
Live Chat Featured Comments
A recap of the featured comments from the MBS Live Dashboard's Live Chat feature, utilized by hundreds of industry professionals each day.

Victor Burek  :  "either they cant sell their products, or they expect future demand"
Andy Pada  :  "what does rising inventories mean?"
Matthew Graham  :  "RTRS- U.S. OCT BUSINESS SALES +0.5 PCT VS SEPT +0.3 PCT (PREV +0.2 PCT) "
Matthew Graham  :  "RTRS- U.S. OCT BUSINESS INVENTORIES +0.7 PCT, BIGGEST RISE SINCE JAN (CONSENSUS +0.3 PCT) VS SEPT +0.6 PCT (PREV +0.6 PCT) "
Matthew Graham  :  "Is it sorta funny that foreclosure starts are the lowest since 2005, loan quality is through the roof, GSE profits are massive, delinquencies are shrinking every month, --all trends that have been intact due to the industries own self regulation--and we haven't even crossed the starting line of QM yet? I know I know... It's not that simple, but there's some sort of conclusion there."
Jason Anker  :  "on November 7, 2013, 118 members of Congress sent a letter to the CFPB requesting a one-year extension to the Qualified Mortgage (QM) rules, which are presently set to go into effect in January 2014. They requested the CFPB to respond by December 1, 2013. As of the release of this Compliance Hotline edition, the CFPB had yet to respond."
Jason Anker  :  "you guys see this?"
Matthew Graham  :  "volume is low as well. No major decisions being made. Just a grindy range trade between 2.8 and 2.88 since Dec 4th."
Matthew Graham  :  "JM: " At current levels, or something reasonably close to them, it feels like bond markets are fairly well hunkered down for next week's FOMC Announcement""
John McClellan  :  "what was that uptick about ?"
Matthew Graham  :  "more of a zone of yields based on 12/5 12/6 highs, 2.863 to 2.883, and I threw out the 5 minute post-NFP spike, FWIW"
Oliver Orlicki  :  "where is our pivot?"
Matt Hodges  :  "don't discount retail effect today. claims are written off all the time when they are worse than expected... play defense"

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