MBS RECAP: Weaker After Data, Stronger After Turkey Headlines

Except for the very end of the trading session, today was all about domestic economic data and all about the logical bond market weakness that followed it.  Every report was against us, with the two biggest offenders hitting hard at 8:30am.  Core CPI rose to 2.3 from 2.2 previously and Retail Sales crushed the +0.1 forecast to come in at +0.6 percent (granted, there was a -0.3 revision to last month, which offset some of the damage we might have otherwise seen).

Bond markets had been flat until that point and promptly began screaming higher.  The rest of the morning's economic data didn't raise any compelling counterarguments although nothing hit as hard as the early data.  Consumer Sentiment was actually weaker at the headline level, which should have been helpful, but the inflation components were higher.  When it comes to Consumer Sentiment, the inflation readings are probably more important than the headline these days, considering the Fed has said outright that it's looking for a sustained increase in consumer inflation expectations.

MBS outpeformed Treasuries, but both took their lumps, finally leveling off well into the worst levels of the week by 2pm.  The normal "Friday afternoon drift" looked like it was in the works when markets suddenly convulsed heading into the close.  This had everything to do with headlines out of Turkey regarding a military coup.  This news came so late in the day that it's anyone's guess where things will be on Monday morning and what the effects will be on bonds.  Markets in general really didn't have a chance to trade it today.