MBS Pricing Snapshot

After opening at the lowest levels in a week, MBS have rallied nicely since about 9:30am, when domestic stock markets open for cash trading. At that time, Fannie 3.0s were trading at 104-21, but have since moved up to 104-31+, a total of 4 ticks higher than yesterday's closing levels. During that same time, S&Ps sold off 10 points and 10yr yields dropped 3bps.

The earlier negativity all occurred BEFORE most lenders generate their first rate sheets of the day, with the ensuing rally taking place both before and after rate sheet time. That makes things a bit uncertain as far as determining the general level of reprice risk as the day progresses and we'd advocated making a note of where Fannie 3.0s were trading when a particular lender released their first rate sheet of the day.

- Inventories +0.7 vs +0.5 consensus
- Sales +1.4 pct vs +0.6 pct in August

The U.S. Census Bureau announced today that the combined value of distributive trade sales and manufacturers’ shipments for September, adjusted for seasonal and trading-day differences but not for price changes, was estimated at $1,263.9 billion, up 1.4 percent (±0.2%) from August 2012 and up 4.4 percent (±0.4%) from September 2011.

Manufacturers’ and trade inventories, adjusted for seasonal variations but not for price changes, were estimated at an end-of-month level of $1,612.9 billion, up 0.7 percent (±0.1%) from August 2012 and up 6.2 percent (±0.4%) from September 2011.

Inventories/Sales Ratio. The total business inventories/sales ratio based on seasonally adjusted data at the end of September was 1.28. The September 2011 ratio was 1.25.

Despite weaker-than-expected Retail Sales and lower-than-expected inflation, bond markets are on the move to weaker territory this morning. The initial reaction to the economic data was actually fairly intuitive, with brief moves into better territory, but the bounce was short-lived.

In fact, any positivity we've seen so far this morning is barely detectable against the backdrop of persistent overnight weakness which is merely extending a trend higher in yields. The Asian trading hours kicked things off in relatively calm fashion, with 10yr yields risking just barely over 1.6, but European hours were much choppier by comparison with a quick swing up over 1.63 and a dip back down to 1.61 just after the US open.

Fannie 3.0s are down 7 ticks so far on the day at 104-21, their lowest marks since 11/6 and 10yr yields are up to 1.627. Notably, there's a fairly important medium term resistance level around 1.61 in 10yr yields. The price action so far today threatens to add to the case for a bounce against that resistance with yesterday's high 1.5's looking like the same sort of "failed test" we saw at the end of August.

MBS specifically are another problem unto themselves as they can't currently be counted on to mirror and match the movements in benchmarks--at least not if the past two session are any indication. At least we're not underperforming today to the same extent we were yesterday.

Coming up at 10am, we have Business Inventories and the Obama news conference, likely to be focused primarily on the Fiscal Cliff, certainly the flavor of the next two months. FOMC minutes will be out at 2pm this afternoon.

- Headline PPI -0.2 vs +0.2 consensus, +1.1 in Sept
- Core PPI -0.2 vs +0.1 consensus, biggest drop since Oct 2010

The Producer Price Index for finished goods declined 0.2 percent in October, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. Prices for finished goods increased 1.1 percent in September and 1.7 percent in August. At the earlier stages of processing, prices received by manufacturers of intermediate goods edged down 0.1 percent in October, and the crude goods index moved up 0.9 percent. On an unadjusted basis, the finished goods index advanced 2.3 percent for the 12 months ended October 2012, the largest rise since a 2.8-percent increase for the 12 months ended March 2012.

- Retail Sales down -0.3 pct vs -0.2 pct consensus and +1.3 pct in September. Markets expected weaker results as the end of October was impacted by Hurricane Sandy, but even when the most affected sectors are factored out, the results were still weaker-than-expected.

The Commerce department noted the effects of the Hurricane, but said those effects cannot be isolated and had received indications of both positive and negative effects on sales.

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for October, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $411.6 billion, a decrease of 0.3 percent (±0.5%)* from the previous month, but 3.8 percent (±0.7%) above October 2011. Total sales for the August through October 2012 period were up 4.7 percent (±0.5%) from the same period a year ago. The August to September 2012 percent change was revised from 1.1 percent (±0.5%) to 1.3 percent (±0.2%).

Retail trade sales were down 0.3 percent (±0.5%)* from September 2012, but 3.8 percent (±0.8%) above last year. Gasoline stations sales were up 7.7 percent (±1.7%) from October 2011 and nonstore retailers were up 7.2 percent (±3.0%) from last year.