MBS Pricing Snapshot

Fannie 3.0's are now down to the first major technical support level stretching back to early July at 103-19. Things would get slightly more serious with a break of 103-16 and very serious at 103-10. Then FOMC next week could change all of that. Good times...

10yr yields are back up over 1.50, currently 1.5207 with support overhead at 1.5268. If you already had rate sheets from a particular lender, there's a risk of negative reprices as long as these levels persist.

(Reuters) - Consumer sentiment fizzled in July, falling to its lowest level of the year so far as Americans took a dim view of their job and income prospects, a survey released on Friday showed.

The Thomson Reuters/University of Michigan's final reading on the overall index on consumer sentiment fell to 72.3 from 73.2 in June. It the second month in a row attitudes have cooled and the lowest level since December.

That was a touch higher than economists' expectations for it to hold steady with July's preliminary reading of 72.

"While consumers do not anticipate an economy-wide recessionary decline, they do not expect a pace of economic growth that could satisfactorily revive job and income prospects," survey director Richard Curtin said in a statement.

One day after European Central Bank President Mario Draghi said that the ECB will do "whatever is necessary to preserve the Euro, and believe me, it will be enough," his claims seem to be put to the test. Draghi's assertion closely followed a speech from ECB's Nowotny, in which he suggested that Europe's permanent bailout fund, the ESM, could be given a banking license, thus allowing it to borrow money directly from the ECB in order to bring down the financing costs of Spain and Italy.

In the overnight session, the Bundesbank (Germany's central bank) spoke out in stern opposition to such ideas, saying that a banking license for bailout funds would be "de facto financing of governments, that would be fatal, and prohibited by European treaties." However in the same breath, they noted that it would be less problematic for the EFSF to buy bonds than for the ECB to do so, leaving the door open to the concept a central Euro zone entity subsidizing the borrowing costs of troubled states.

While direct intervention may fall only in the realm of the EFSF on paper, the ECB has purchased the bonds of troubled states in open market operations in the past and news that it could happen again greatly counteracted the Bundesbank's statements. Le Monde, a French paper, quoted "sources" as saying that Merkel and Hollande would discuss a plan for ECB bond buying today. We've since seen wires from the conversation, but nothing definitive.

Bottom line, risk markets shifted in a slightly optimistic direction on yesterday's Draghi speech and now the Le Monde story gives it some teeth, yet the world waits for better confirmation. In the meantime, an as-expected GDP print has essentially allowed the momentum from overnight trading to continue. It was clear that domestic bond markets were setting up to use the GDP print as a staging area to push back against the sell-off, but they didn't get a weak enough result to do so.

Thus we find production MBS about 7 ticks weaker so far this morning at 103-25 in Fannie 3.0's. A break below 103-20 would constitute a 'test' of the long-standing uptrend, but one that would require confirmation next week, and next week is FOMC, so today's volatility is relatively moot. Next up is Consumer Sentiment as the last piece of economic data this week. We're also still on guard for any additional Merkal/Hollande headlines.

- headline +1.5 vs +1.5 consensus, +2.0 previous
- Final Sales +1.2 vs +1.4 consensus, +2.4 previous
- Consumer Spending +1.5 pct vs +2.4 previous, smallest rise since 2011

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 1.5 percent in the second quarter of 2012, (that is, from the first quarter to the second quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 2.0 percent.

The increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, nonresidential fixed investment, private inventory investment, and residential fixed investment that were partly offset by a negative contribution from state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased.