MBS Pricing Snapshot

The outlook for growth in the U.S. economy looks weaker now than it did three months ago, according to 48 forecasters surveyed by the Federal Reserve Bank of Philadelphia. The forecasters expect real GDP to grow at an annual rate of 1.6 percent this quarter, down from the previous estimate of 2.5 percent. Over the next three quarters, they expect GDP growth to average 2.1 percent, down from the previous average of 2.6 percent. On an annual-average over annual-average basis, the forecasters also predict slower real output growth over the next four years. The forecasters see real GDP growing 2.2 percent in 2012, down from their prediction of 2.3 percent in the survey of three months ago. The forecasters predict real GDP will grow 2.1 percent in 2013, 2.7 percent in 2014, and 3.1 percent in 2015, each somewhat lower than their respective predictions in the last survey.

Projections for weaker conditions in the labor market accompany the outlook for real output. Unemployment is projected to be an annual average of 8.2 percent in 2012, before falling to 7.9 percent in 2013, 7.3 percent in 2014, and 7.0 percent in 2015. The estimates for unemployment are slightly higher than the projections in the last survey.

On the employment front, the forecasters have revised downward their estimates of the growth in jobs over the next four quarters. The forecasters see nonfarm payroll employment growing at a rate of 125,000 jobs per month this quarter and 135,300 jobs per month next quarter. The forecasters’ projections for the annual-average level of nonfarm payroll employment suggest job gains at a monthly rate of 154,600 in 2012 and 143,200 in 2013, as the table below shows. (These annual-average estimates are computed as the year-to-year change in the annual-average level of nonfarm payroll employment, converted to a monthly rate.)

Bond markets hinted at the possibility of a relief rally following yesterday's 30yr Bond Auction, but stopped short of breaking through the stronger levels from earlier that morning. The overnight session kicked off with much weaker-than-expected trade data out of China. This sparked some decent buying interest in Treasuries as did the European bond market rally that began a few hours later. All told, 10yr notes walked in the door just under 1.64 after going out at just over 1.69 yesterday.

The improvements allowed MBS settlement for Fannie and Freddie 30yr fixed coupons to pass almost imperceptibly. In fact, if you didn't look at Treasuries and ask yourself why MBS weren't more improved than a mere tick or two from yesterday's closing level, you might never know that you're looking at prices for September coupons as opposed to the August coupons quoted yesterday. This is why Fannie 3.0s are showing an improvement of roughly 10 ticks so far this morning despite appearing to be relatively even with yesterday's closing levels.

There's not much else on tap today at home or abroad, leaving markets to "trade it out." So far, so good, and while we're definitely not out of the woods yet, we're getting closer. Still, at current levels, we have a long way to go before being able to consider recent weakness to be merely a head-fake.

* Import Prices -0.6 Pct vs +0.1 pct consensus
* Export Prices +0.5 Pct vs 0.0 pct consensus
* Annual import prices -3.2 pct, most since Oct 2009

U.S. import prices declined 0.6 percent in July, the U.S. Bureau of Labor Statistics reported today, after decreasing 2.4 percent in June and 1.5 percent in May. In each of the past three months, falling prices for both fuel and nonfuel imports contributed to the overall drop. In contrast, U.S. export prices rose 0.5 percent in July following a 1.7 percent decline the previous month.