MBS Pricing Snapshot

The final reading on Consumer Sentiment for October fell just slightly from the 83.1 preliminary figures, but at 82.6, is roughly in line with the 83.0 consensus. A quick run-down of the components:

• Current Conditions: 88.1 vs 89.0 consensus
• Expectations 79.0 vs 79.8 consensus
• 12-Month Outlook 96 vs 97 Previous
• 1yr Inflation Expectations 3.1 pct, unchanged

Despite ebbing a bit from the last preliminary reading, the 82.6 final reading is the highest since September 2007.

Market reaction has been generally positive for bond markets and negative for equities, though both of those moves (lower in stock prices and Treasury yields, higher in MBS prices) have bounced before getting back to their extremes from the overnight session.

10 Treasuries are roughly 0.8bps higher since the 8:30am GDP release while Fannie 3.0s are a tick off their highs at 104-17 vs 104-18 -- not huge movements as far as post-economic-data volatility is concerned. S&P futures rose 7 points at their best (from 8:30am levels), but that gain has eased to 5 points currently. Bottom line, GDP hasn't been a barn burner.

The overnight session was compelling! It was highly active and essentially offered a mirror image of yesterday's session with Asian hours kicking off a bigger than normal "risk-off" trade vs yesterday's "risk-on." European hours again contributed a greater than normal amount of volume and volatility, but this time in a friendlier direction. 10yr yields made it all the way into the 1.75's before beginning their more conservative approach to the GDP data.

Given the fairly conservative reaction to GDP, that leaves the overnight session as the most informative event so far today. It shows a certain level of conviction on the part of bond markets to hold the weak end of their recent range as support heading into the traditionally supportive "last few days of the month" which arrive at the beginning of next week. From there it's fair to assume that the "next big thing™" will be Friday's NFP.

Next up is Consumer Sentiment at 9:55am--in and of itself, not the report that's going to make or break the session, and with yesterday's overnight highs at 1.85% in 10yr yields, there's quite a bit of room to run without bond markets making too big of a bearish statement. 1.75% is the flip side that likely provides resistance, or at least pause for reflection if the late morning and afternoon trade happens to evolve positively.

What we're saying here is that the range for the rest of the day is probably set, and only breaks outside that range would be significant in the bigger picture. Smaller picture, there's a clear pivot in MBS at 104-13 which marks both yesterday's highs and today's lows. Breaking below that would raise concerns for negative reprices (assuming the price action doesn't go all wonky between now and the time the rest of rate sheets make it out). Anything above that is gravy, especially a marked break above 104-19 which was a clearly defined pivot point between Tuesday and Wednesday.

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 2.0 percent in the third quarter of 2012 (that is, from the second quarter to the third quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 1.3 percent.

The Bureau emphasized that the third-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency (see box below). The "second" estimate for the third quarter, based on more complete data, will be released on November 29, 2012.

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

The acceleration in real GDP in the third quarter primarily reflected an upturn in federal government spending, a downturn in imports, an acceleration in PCE, a smaller decrease in private inventory investment, an acceleration in residential fixed investment, and a smaller decrease in state and local government spending that were partly offset by downturns in exports and in nonresidential fixed investment.