MBS Pricing Snapshot

First of all, we have Bernanke's prepared remarks falling very short of increasing any expectations for new/additional easing. And now as the Q&A is underway, QE3 seems to be a tertiary topic in favor of fiscal cliffs and LIBOR.

Stocks are very unhappy about this, down the better part of 15 points in S&P's while bond markets have firmed up a bit. 10's are back down to 1.4723 and MBS are in the green with Fannie 3.0's up 2 ticks on the day at 103-21. Q&A is ongoing, but so far so good for MBS.

Bernanke answers questions at semiannual report to Congress.

Chairman Johnson, Ranking Member Shelby, and other members of the Committee, I am pleased to present the Federal Reserve's semiannual Monetary Policy Report to the Congress. I will begin with a discussion of current economic conditions and the outlook before turning to monetary policy.

The Economic Outlook The U.S. economy has continued to recover, but economic activity appears to have decelerated somewhat during the first half of this year. After rising at an annual rate of 2-1/2 percent in the second half of 2011, real gross domestic product (GDP) increased at a 2 percent pace in the first quarter of 2012, and available indicators point to a still-smaller gain in the second quarter.

Industrial production increased 0.4 percent in June after having declined 0.2 percent in May. In the manufacturing sector, output advanced 0.7 percent in June and reversed a decrease of 0.7 percent in May. In the second quarter of 2012, manufacturing output rose at an annual rate of 1.4 percent, a marked deceleration from its strong gain of 9.8 percent in the first quarter. The largest contribution to the increase in the second quarter came from motor vehicles and parts, which climbed 18.2 percent; excluding motor vehicles and parts, manufacturing output edged up 0.1 percent. Outside of manufacturing, the output of mines advanced 0.7 percent in June, while the output of utilities decreased 1.9 percent. For the quarter, however, the output of mines fell at an annual rate of 1.2 percent, while the output of utilities rose 14.9 percent. At 97.4 percent of its 2007 average, total industrial production in June was 4.7 percent above its year-earlier level. Capacity utilization for total industry moved up 0.2 percentage point in June to 78.9 percent, a rate 1.4 percentage points below its long-run (1972--2011) average.

The overnight session wasn't too troubling for bond markets though 10yr yields followed German Bunds marginally higher. Bunds rose despite a weaker reading on economic sentiment and weaker-than-expected short-term Italian debt auction, potentially taking heart in lower short-term Spanish borrowing costs.

But all of the potential European market movers are neither here nor there as the movement was minor enough to be considered relatively flat. 10's held a 1.47 to 1.495 range and have already firmed up to 1.485 in early domestic trading. MBS opened a few ticks weaker at 104-15 in Fannie 3.0s and have since moved up to 103-17, a mere 2 ticks lower than y'day's 5pm levels.

There's only one more report before Bernanke's congressional testimony, which is seen as the key event of the day/week. Industrial production/capacity utilization prints at 9:15am and is expected to rise 0.3 pct after falling 0.1 pct last month. Bernanke's testimony begins 45 minutes later.

The U.S. Department of the Treasury today released Treasury International Capital (TIC) data for May 2012. The next release, which will report on data for June 2012, is scheduled for August 15, 2012.

The sum total in May of all net foreign acquisitions of long-term securities, short-term U.S. securities, and banking flows was a monthly net TIC inflow of $101.7 billion. Of this, net foreign private inflows were $60.3 billion, and net foreign official inflows were $41.4 billion.

Foreign residents increased their holdings of long-term U.S. securities in May – net purchases were $50.1 billion. Net purchases by private foreign investors were $19.9 billion, and net purchases by foreign official institutions were $30.2 billion.

At the same time, U.S. residents decreased their holdings of long-term foreign securities, with net sales of $4.9 billion.

Taking into account transactions in both foreign and U.S. securities, the net foreign purchases of long-term securities were $55.0 billion. After including adjustments, such as estimates of unrecorded principal payments to foreigners on U.S. asset-backed securities, the overall net foreign acquisition of long-term securities is estimated to have been $39.3 billion in May.

* June Core CPI +0.2 pct vs +0.2 pct Consensus
* No market response as expected

The Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in June on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.7 percent before seasonal adjustment.

The energy index continued to fall in June, but its decline was offset by increases in the indexes for food and all items less food and energy. The energy index fell 1.4 percent as the gasoline index declined for the third month in a row; other energy indexes were mixed. The food index rose 0.2 percent after being unchanged last month as the index for food at home turned up in June.

The index for all items less food and energy rose 0.2 percent in June, the fourth consecutive such increase. The shelter index posted its smallest increase since September, the index for used cars and trucks was unchanged after a series of increases, and the index for airline fares declined. However, the index for medical care posted its largest increase since 2010 and the indexes for apparel and recreation both rose substantially in June.

The 12-month change in the index for all items was 1.7 percent in June, the same figure as in May. The energy index declined 3.9 percent over the last 12 months, while the food index rose 2.7 percent. The index for all items less food and energy rose 2.2 percent for the 12 months ending June, a slight decline from the 2.3 percent figure in May.