MBS Pricing Snapshot

Before yesterday afternoon, the first significant "double top" for Treasuries was seen on 8/3 after rising from the late July all time lows. That kept 10yr yields under 1.60--a level we discussed as being an informative pivot point at the time. After that broke on 8/7, we've essentially been drifting painfully weaker in both Treasuries and MBS until getting our first glimpse of the possibility of another potential supportive ceiling as 10's made a new double top at 1.7309.

This raised the question: could this finally be evidence of a supportive event that marks the end of the recent sell-off? Or was it merely another short term glimmer of hope amid a broader, ongoing trend of selling?

That question was definitively answered before we even got in the door this morning. In fact it was answered shortly after Europe got out of bed. Given the utter lack of market moving motivation at the time, it's clear that Europe woke up and simply began selling. Bond markets at home and abroad simply drifted sideways overnight until the 2am German Bund open at which point Bunds promptly sold off 5bps. It was as if European bond traders mistook the "sell" button for the "snooze" button on the metaphorical alarm clock.

Alarms consequently rang for Treasuries as well who followed the move higher in yield, hitting 1.79 at the highs. This very simple perpetuates the trend of weakness. Paradoxically, it's both frustrating and comforting that the trend is being driven more by serendipitous technical and structural trading in lighter volume than normally accompanies such moves.

It's rare anymore to see an economic report have a meaningful impact on the trading range, although those technical and structural tradeflows do a great job of hiding behind the data releases. Case in point, volume swelled noticeably at 8:30am this morning, but neither took out the highs or lows of the overnight session.

Mix in the fact that all this is occurring while most of the European governance is out on vacation and the notion we mentioned yesterday of the "cats playing while the dogs are away" continues to seem plausible.

Whatever the case, we're in the red, and though 10yr yields have bounced back down into the 1.76's, the fact is that earlier high yields have only served to expand the recent range in it's same unfriendly direction. This trend is not your friend. Fannie 3.0s are down 6 ticks on the day currently at 102-17.

* Output +0.6 vs +0.5 consensus
* CapU 79.3 vs 79.2 consensus
* Manufacturing Output in line with consensus
* Overall, this one was a Snoozer. Markets much more keen to trade the technical and structural scene.

Industrial production increased 0.6 percent in July after having risen 0.1 percent in both May and June. Revisions to the rates of change for recent months left the level of the index in June little changed from its previous estimate. Manufacturing output rose 0.5 percent in July, the same rate of increase as was recorded for June. In July, the output of mines increased 1.2 percent, and the output of utilities rose 1.3 percent. At 98.0 percent of its 2007 average, total industrial production in July was 4.4 percent above its year-earlier level. Capacity utilization for total industry moved up 0.4 percentage point to 79.3 percent, a rate 1.0 percentage point below its long-run (1972--2011) average.

The U.S. Department of the Treasury today released Treasury International Capital (TIC) data for June 2012. The next release, which will report on data for July 2012, is scheduled for September 18, 2012.

The sum total in June of all net foreign acquisitions of long-term securities, short-term U.S. securities, and banking flows was a monthly net TIC inflow of $16.7 billion. Of this, net foreign private inflows were $28.8 billion, and net foreign official outflows were $12.1 billion.

Foreign residents increased their holdings of long-term U.S. securities in June – net purchases were $5.5 billion. Net sales by private foreign investors were $1.4 billion, and net purchases by foreign official institutions were $6.8 billion.

At the same time, U.S. residents decreased their holdings of long-term foreign securities, with net sales of $3.9 billion.

Taking into account transactions in both foreign and U.S. securities, the net foreign purchases of long-term securities were $9.3 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 negative $6.0 billion in May.

Foreign residents increased their holdings of U.S. Treasury bills by $1.7 billion. Foreign resident holdings of all dollar-denominated short-term U.S. securities and other custody liabilities decreased by $1.0 billion.

Banks’ own net dollar-denominated liabilities to foreign residents increased by $23.7 billion.

The Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in July on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.4 percent before seasonal adjustment.

Major indexes posted small movements in July, with a 0.3 percent decline in the energy index offsetting 0.1 percent increases in the indexes for food and all items less food and energy. Within energy, declines in the indexes for electricity, natural gas, and fuel oil more than offset a small increase in the gasoline index. Within the food component, the food at home index was unchanged with major grocery store food group indexes mixed, while the food away from home index increased.

The index for all items less food and energy rose 0.1 percent in July, ending a streak of four consecutive 0.2 percent increases. The shelter index rose 0.1 percent for the second month in a row. The indexes for medical care, tobacco, household furnishings and operations, and apparel also increased, while the indexes for airline fares, used cars and trucks, recreation, and new vehicles all declined.

The 12-month change in the index for all items was 1.4 percent in July. This compares to 1.7 percent in June and is the smallest 12- month change since November 2010. The index for all items less food and energy rose 2.1 percent for the 12 months ending July, a slight decline from the 2.2 percent figure in June and its smallest increase since October 2011.

The August Empire State Manufacturing Survey indicates that conditions for New York manufacturers deteriorated over the month.

The general business conditions index slipped below zero for the first time since October 2011, falling thirteen points to -5.9. At -5.5, the new orders index was below zero for a second consecutive month, and the shipments index fell six points to 4.1. The prices paid index climbed nine points to 16.5, pointing to a pickup in the pace of increase in input prices, while the prices received index hovered just above zero for a third consecutive month. The index for number of employees inched lower, but remained positive at 16.5, suggesting a moderate increase in employment levels, and the average workweek index rose to 3.5. Indexes for the six-month outlook were generally positive but lower than in July, indicating that respondents expected business conditions to improve little in the months ahead.

In a series of supplementary questions, manufacturers were asked about modifications to 2012 hiring and capital spending—both year-to-date changes and revisions planned for the rest of the year. Substantially more fi rms (roughly twice as many) made downward than upward revisions in their plans for the second half of the year. As for actual spending year-to-date, modest downward adjustments were made, on balance. When asked about negative influences on 2012 hiring and capital spending plans, a majority of respondents cited increased uncertainty about business prospects.