MBS MID-DAY: Low Gas Prices Now Like QE. Here's How That's Helping Us

By: Matthew Graham

Be warned that the following reduces a complex, multifaceted issue to one of its individual components.  It's merely an examination of this one component (and a superficial one at that) and it's effect on today's trading.

Oil has been a big deal since it began tanking in late 2014.  As rates began to rise in 2015, analysts began suggesting that a rise in oil was partly to blame.  Of course, the only way that truly makes sense is to assume oil is rising WITH rates for OTHER reasons as opposed to assuming a rise in oil prices is actually pushing rates higher.

Why "of course?"  Let's take a look at what happens when prices rise again.  Today's Consumer Sentiment numbers tell the story.  88.6 vs 96.0 forecast and a marked increase in inflation expectations.  Here's a chart of consumer sentiment and gas prices (inverted so that higher = lower prices).  It doesn't really matter which is which (incidentally, sentiment is in orange).

The takeaway is that fuel prices had an outsized impact on sentiment heading into 2015.  In fact, sentiment never broke 2013's highs until the big drop in fuel prices began.  Now that consumers have had a taste of those prices, they'll be increasingly sensitive to adjustments in the other direction, just like markets are sensitive to the Fed pulling away one of their various punch bowls.   It just so happens the consumer punch bowl is filled with gas.

While Consumer Sentiment isn't the market's favorite gauge of growth, a pessimistic consumer certainly counts for something AND during a time where much of the economic data (apart from job counts) is lackluster.  This doesn't bode well for the Fed being able to cite a growing economy as a reason for a rate hike.

All that to say: bonds are rallying nicely today, and surprisingly enough, the rally kicked into high gear after Consumer Sentiment data.  Granted the trading levels coincided with some technical levels that triggered modest snowball buying, but those levels may never have been hit without the sentiment data.


MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.
MBS
FNMA 3.0
101-06 : +0-14
FNMA 3.5
104-13 : +0-11
FNMA 4.0
106-24 : +0-05
Treasuries
2 YR
0.5400 : -0.0040
10 YR
2.1420 : -0.0930
30 YR
2.9270 : -0.1290
Pricing as of 5/15/15 12:53PMEST

Morning Reprice Alerts and Updates
A recap of Alerts and Updates provided to MBS Live subscribers.
9:51AM  :  Bond Markets at Best Levels After Industrial Production Data (But Not Because of It)

Live Chat Featured Comments
A recap of featured comments from the Live Discussion on the MBS Live Dashboard.
Matthew Graham  :  "RTRS - UNIVERSITY OF MICHIGAN SURVEYS OF CONSUMERS SENTIMENT PRELIM MAY 88.6 (CONSENSUS 96.0) VS FINAL APRIL 95.9"
Hugh W. Page  :  "The answer is............. 1888"
Hugh W. Page  :  "LOL Trivia for a Friday. How how many pages is the CFPB Final Rule on TRID?"
Jason Anker  :  "run AUS - fund loan"
Sung Kim  :  "if there is a score, it will go through AUS"
Craig LaBruno  :  "Got a client buying a home putting down 30% but when I ran credit she is only being scored by 1 bureau because of lack of credit. The husband who will also be on the loan has all 3 scores but only 1 open and active account. Any suggestions? "
Matthew Graham  :  "RTRS - U.S. APRIL CAPACITY USE RATE 78.2 PCT (CONS 78.4 PCT) VS MARCH 78.6 PCT (PREV 78.4 PCT)"
Matthew Graham  :  "RTRS - U.S. APRIL INDUSTRIAL OUTPUT -0.3 PCT (CONSENSUS +0.1 PCT) VS MARCH -0.3 PCT (PREV -0.6 PCT)"
Matthew Graham  :  "RTRS- NY FED'S EMPIRE STATE INDEX +3.09 IN MAY (CONSENSUS 5.00) VS -1.19 IN APRIL"
Bill Hills  :  "...you have a gift in being able to communicate and dumb down the technical stuff without being condescending to those of us who only look at the colors. This is a great thing you have going here. Many thanks for what you do... it is very valuable to my business. I'm so much nicer when I see green."