MBS Pricing Snapshot

Following this morning's shake-up over the stronger-than-expected GDP and Jobless Claims data, bond market trading has proceeded in a rather uneventful fashion, but has slowly and steadily wound its way back in a more positive direction. Some of this has to do with the preexisting technical environment that we discussed in this morning's commentary. The gist there was that bonds have sold-off sufficiently ahead of NFP and the default momentum today would be sideways.

The other factors were the counterpoints in both of this morning's data sets. GDP could be somewhat discounted due to inventory building and Claims due to seasonal factors (yes, claims are seasonally adjusted, but the Labor Department noted that the seasonal adjustments were difficult to apply due to the holiday).

Whatever the mix of those factors might be, they've certainly added up for steady retracement back toward unchanged levels. After being as low as 103-10, Fannie 4.0s are back within 1 tick of unchanged at 103-18. 10yr yields are only 1bp off unchanged at 2.8516.

- Previous week revised to 321k from 316k
- 4-week average fell to 322,250 from 333k
- Continued Claims 2.744 mln vs 2.82 mln forecast
- Continued claims lowest since Dec 2007
In the week ending November 30, the advance figure for seasonally adjusted initial claims was 298,000, a decrease of 23,000 from the previous week's revised figure of 321,000. The 4-week moving average was 322,250, a decrease of 10,750 from the previous week's revised average of 333,000. The advance seasonally adjusted insured unemployment rate was 2.1 percent for the week ending November 23, unchanged from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending November 23 was 2,744,000, a decrease of 21,000 from the preceding week's revised level of 2,765,000. The 4-week moving average was 2,796,500, a decrease of 32,500 from the preceding week's revised average of 2,829,000.

- GDP +3.6 vs +3.0 forecast
- Consumer Spending +1.4, lowest since Q4 2009
- Business Inventory buildup added 1.68 to GDP
- Inventory change adds most to GDP since Q4 2011
- market reaction: A strong headline, but not without some "yeah buts." Bond markets seem to be conveying this with an initial spike into weaker territory followed by better support than we would typically expect based on the headline alone.

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 3.6 percent in the third quarter of 2013 (that is, from the second quarter to the third quarter), according to the "second" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 2.5 percent.

The GDP estimate released today is based on more complete source data than were available for the "advance" estimate issued last month. In the advance estimate, the increase in real GDP was 2.8 percent (see "Revisions" on page 3). With this second estimate for the third quarter, the increase in private inventory investment was larger than previously estimated.

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

The acceleration in real GDP growth in the third quarter primarily reflected an acceleration in private inventory investment, a deceleration in imports, and an acceleration in state and local government spending that were partly offset by decelerations in exports, in PCE, and in nonresidential fixed investment.

The overnight session was straightforward. Nothing happened. 10yr yields spent almost the entire time between 2.84 and 2.83. No volume spikes, no volatility.

The sideways theme would have likely continued all day if this morning's data was close to consensus, but it wasn't. Initial Claims dropped to 298k vs a 325k forecast and GDP came in at a seemingly boomy 3.6 pct vs a 3.0 pct forecast.

Fannie 4.0s dropped a quick 6 ticks and are currently 8 ticks lower (0.25) on the day at 103-10. 10yr yields are doing battle with 2.87 after approaching the data at 2.848.

So far, MBS are holding inside yesterday's weakest levels, and although Treasuries are not, they are keeping inside 2.87 for now. There are some holes to be poked in the data as GDP drew plenty of strength from another inventory build-up. Consumer spending was also the weakest since the 4th quarter of 2009. On the Jobless Claims front, investors may be willing to discount the move a bit due to the expected seasonal hiring that takes place this time of year.

Combine all that with NFP coming up tomorrow and a fairly brisk selling trend since late November, and the damage thus far, is lighter than you might expect given the magnitude of the data "beats."