MBS Pricing Snapshot

* Inventories +0.3 pct vs +0.2 consensus, Sales as expected.

Sales. The U.S. Census Bureau announced today that the combined value of distributive trade sales and manufacturers’ shipments for May, adjusted for seasonal and trading-day differences but not for price changes, was estimated at $1,245.2 billion, down 0.1 percent (±0.2%)* from April 2012 and up 5.1 percent (±0.4%) from May 2011.

Inventories. Manufacturers’ and trade inventories, adjusted for seasonal variations but not for price changes, were estimated at an end-of-month level of $1,578.4 billion, up 0.3 percent (±0.1%) from April 2012 and up 5.2 percent (±0.3%) from May 2011.

The overnight session was extremely quiet with low volume and volatility. Things got off to a slow start in Asian hours owing to a market holiday for Japan though comments from China's PM Wen that the rebound was not yet stable helped fuel slight gains early. Things ratcheted another notch to the positive side in European hours as the ECB backtracked on their previous stance on losses for Spanish bond-holders (before they were said to be immune to losses through the restructuring, but now, not so much. They ECB has declined to comment on the decision).

10yr yields were already trading in a tight range just under 1.50 at the open, but moved quickly lower from 1.48 to 1.45 following the worse-than-expected Retail Sales data. 10yr yields hit all time lows last month of 1.442. MBS opened just slightly higher than Friday's latest levels and got a similar shot in the arm after Retail Sales, moving from 103-14 to 103-19.

Both MBS and Treasuries have now backed off their rallies just slightly. The Business Inventories report prints at 10am and before that, the cash open for equities markets could be the next market-moving consideration for bond markets.

The July Empire State Manufacturing Survey indicates that manufacturing activity expanded modestly over the month. The general business conditions index rose fi ve points to 7.4. New orders, however, declined, as that index slipped into negative territory for the fi rst time since November 2011, falling five points to -2.7. The shipments index increased five points to 10.3, indicating a rise in shipments. The prices paid index declined for a fourth consecutive month, dropping twelve points to 7.4, its lowest level since mid-2009. The prices received index inched up three points to 3.7. Employment levels climbed higher, with the employment index rising six points to 18.5, while the average workweek index fell three points to zero. Future indexes were generally positive, but many continued to drift downward and suggested that the level of optimism about future conditions remains below the level earlier this year.

In a series of supplementary questions, manufacturers were asked about their sales performance and expectations for 2012 compared with 2011. The median respondent reported that sales were up 4.5 percent for the first half of 2012 compared with the first six months of 2011, and are expected to be up 5 percent for the full calendar year—values slightly lower than what were reported in last July’s survey. In the current survey, the median respondent indicated a 2 percent increase in the number of employees—both for the fi rst half of this year and for what is expected for the full-year 2012. On another question, moderately more respondents indicated that they had ramped up rather than scaled back production plans since the beginning of the year, refl ecting a bit more optimism than last year’s responses suggested.

* -0.5 vs +0.2 Consensus
* -Core -0.4 vs 0.0 Consensus
* 3rd straight decline, first 3-month decline since 2008

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for June, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $401.5 billion, a decrease of 0.5 percent (±0.5%)* from the previous month, but 3.8 percent (±0.7%) above June 2011. Total sales for the April through June 2012 period were up 4.7 percent (±0.5%) from the same period a year ago. The April to May 2012 percent change was unrevised from -0.2 percent (±0.2%)*.

Retail trade sales were down 0.5 percent (±0.5%)* from May 2012, but 3.5 percent (±0.7%) above last year. Nonstore retailers sales were up 10.9 percent (±3.1%) from June 2011 and furniture and home furnishings stores were up 7.8 percent (±2.8%) from last year.