MBS Pricing Snapshot

MBS were already well on their way to the lows of the morning before Consumer Sentiment printed a surprisingly strong 79.2 vs 74.0 consensus. After being in positive territory earlier Fannie 3.0s are now down more than half a point. The situation is quite serious and exactly the sort of thing we cautioned against in the morning alert.

Essentially we have bond markets in full melt-down mode and Stocks in full skyrocket mode. While MBS can naturally and significantly outperform Treasuries at the moment, that outperformance is little consolation when the whole of bond-marketdom is tanking together. 10's are at 1.873 and rising. Fannie 3.0's are down 19 ticks on the day at 104-01. Any lenders that were out with pricing before, say 9:45 are at serious risk of repricing for the worse. More to follow as necessary.

THOMSON REUTERS/U. OF MICH US CONSUMER SENTIMENT INDEX PRELIMINARY SEPTEMBER 79.2 (CONSENSUS 74.0) VS FINAL AUGUST 74.3

THOMSON REUTERS/U. OF MICH CURRENT CONDITIONS INDEX PRELIMINARY SEPTEMBER 88.3 (CONSENSUS 86.3) VS FINAL AUGUST 88.7

THOMSON REUTERS/U. OF MICH CONSUMER EXPECTATIONS INDEX PRELIMINARY SEPTEMBER 73.4 (CONSENSUS 65.0) VS FINAL AUGUST 65.1

THOMSON REUTERS/U. OF MICH 12-MONTH ECONOMIC OUTLOOK INDEX PRELIMINARY SEPTEMBER 88 VS FINAL AUGUST 73

THOMSON REUTERS/U. OF MICH 1-YEAR INFLATION OUTLOOK PRELIMINARY SEPTEMBER 3.5 PCT VS FINAL AUGUST 3.6 PCT

THOMSON REUTERS/U. OF MICH 5-YEAR INFLATION OUTLOOK PRELIMINARY SEPTEMBER 2.8 PCT VS FINAL AUGUST 3.0 PCT

THOMSON REUTERS/U. OF MICH CONSUMER SENTIMENT, CONSUMER EXPECTATIONS, 12-MONTH OUTLOOK ALL HIGHEST SINCE MAY

- Industrial Production -1.2 vs +0.0 consensus
- Fed chalks up 0.3 of the loss to TS Isaac
- Manufacturing output -0.7 vs +0.4 last month
- Mining -1.8 vs +1.0 last month
- Fed says mining decline due to gulf oil shut-downs re: TS Isaac

Industrial production fell 1.2 percent in August after having risen 0.5 percent in July. Hurricane Isaac restrained output in the Gulf Coast region at the end of August, reducing the rate of change in total industrial production by an estimated 0.3 percentage point. Manufacturing output decreased 0.7 percent in August after having risen 0.4 percent in both June and July. Precautionary shutdowns of oil and gas rigs in the Gulf of Mexico in advance of the hurricane contributed to a drop of 1.8 percent in the output of mines for August. The output of utilities declined 3.6 percent. At 96.8 percent of its 2007 average, total industrial production in August was 2.8 percent above its year-earlier level. Capacity utilization for total industry moved down 1.0 percentage point to 78.2 percent, a rate 2.1 percentage points below its long-run (1972--2011) average.

Treasuries haven't been crushed in the overnight session as much as they've been "re-crushed." In other words, 10yr yields were pushed back to to yesterday's highs at 1.83+ in the overnight session as German Bunds sold off as well. Big asset allocation trades are a factor given the ostensible new world orders from the Fed. That means that longer-term, more strategic type accounts are adjusting their portfolios away from Treasuries and into things like stocks and MBS.

MBS opened up in somewhat weaker territory but were quickly scooped up back over yesterday's highs. Fannie 3.0s are at 104-24 at the moment, a new all-time high. The major concern here 10's at 1.80 again is that we embark on some sort of extended sell-off in bond markets. If that happens, sure, MBS would absolutely outperform Treasuries, but they could do so even while moving lower in price.

We don't have any reason to believe that this will be the case, but don't want to assume the rally in MBS continues unabated if not supported by at least some measure of broader bond market strength. For now though, broader bond markets look to be holding their ground at similar levels to yesterday.

With Industrial production just printing -1.2 vs a +0.0 consensus, we're in pretty good shape for the rest of the morning in terms of economic data's impact on trading -- whatever that may actually be (because we think the ongoing reaction to QE3 is the bigger trading motivation). The last report of the morning hits at 9:55am with Consumer Sentiment.

* Headline CPI +0.6 this month vs +0.5 consensus
* Core CPI +0.1 vs +0.2 consensus
* Core CPI + 0.0521 annually vs +0.2 consensus
* Inflation adjusted earnings -0.6 vs -0.3 consensus

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.6 percent in August 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 seasonally adjusted increase in the all items index was the largest since June 2009. About 80 percent of the increase was accounted for by the gasoline index, which rose 9.0 percent and was the major factor in the energy index rising sharply in August after declining in each of the four previous months.

The food index increased 0.2 percent in August, with major grocery store food group indexes mixed. The index for all items less food and energy rose 0.1 percent for the second month in a row. The indexes for shelter, medical care, personal care, new vehicles, and recreation all rose in August. These increases more than offset declines in the indexes for used cars and trucks, apparel, household furnishings and operations, and airline fares.

The 12-month change in the index for all items was 1.7 percent in August, an increase from the July figure of 1.4 percent. The index for all items less food and energy rose 1.9 percent for the 12 months ending August, a slight decline from the 2.1 percent figure in July and its smallest increase since July 2011.

* +0.9 vs +0.7 consensus
* Gas sales +5.5%, largest rise since Nov 2009
* Excluding Gas, Retail Sales +0.3

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for August, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $406.7 billion, an increase of 0.9 percent (±0.5%) from the previous month and 4.7 percent (±0.7%) above August 2011. Total sales for the June through August 2012 period were up 4.0 percent (±0.5%) from the same period a year ago. The June to July 2012 percent change was revised from 0.8 percent (±0.5%) to 0.6 percent (±0.2%).

Retail trade sales were up 0.9 percent (±0.5%) from July 2012 and 4.4 percent (±0.7%) above last year. Auto and other motor vehicle dealers were up 12.3 percent (±2.5%) from August 2011 and nonstore retailers sales were up 10.6 percent (±3.1%) from last year.