Today market participants were reminded of the feeble condition of the US economy. The resulting trade was: AAAAAAAAAAAAAAAAAAAAAAAAAAHHHHHHHHH!!!!

(image Courtesy of Fox Broadcasting)

Here's a recap of the data...

US Import prices fell 4.2% in December following a revised (for the worse) 7.0% decline in November. YoY import prices 9.3% which is sadly the largest yearly decline since forever (well since keeping track anyway). It should be noted that the culprit of this record setting decline has been the precipitous fall of energy prices.  Excluding Petroleum imports import prices only fell 1.1% in December and 1.8% in November. So we went from a commodity driven period of stagflation to a commodity based period of deflation in less than one year.

December Retail Sales fell 2.7%...way worse than the 1.2% decline economists were expecting. Sales fell in pretty much every category except for marginal increases in health care/personal care and miscellaneous store retailers.  It is no surprise that consumers have slowed spending. Clothing sales dropped by 2.5% and department store sales fell 2.3%. Gas stations got worked...their sales fell 15.9% as fuel prices have been radically reduced by a lack of demand. Since the July peak in crude oil prices gas station sales have declined 42.1%. On the bright side auto sales only fell 0.7%...yiippeee!!!!! Before we make any deflationary comments we will need to re-access US price levels...mark Jan.30 on your calendar for advance Q4 GDP estimates.

The Federal Reserve released the Beige Book today. Here is an excerpt...you be the judge.

"Overall economic activity continued to weaken across almost all of the Federal Reserve Districts since the previous reporting period. Conditions in residential real estate markets continued to worsen in most Districts. Reduced home sales, lower prices, or decreases in construction activity were noted in many Districts. Commercial real estate markets deteriorated in most Districts, with weakening construction noted in several Districts. Overall lending activity declined in several Districts, with tight or tightening lending conditions reported in most Districts. Credit quality remained a concern in several Districts."

Yeah Ewww!!!

So the theme of the day was FTQ------> FLIGHT TO QUALITY

Out the gate stocks stunk it up...but managed to close off the lows for the day

 The Yield Curve flattened out...yeah we know its primative but it gets the point across!!!

As discussed earlier today....the MBS stack is looking for some direction. Here's how the stack closed today

Fn 4.0 ->  -0-01+ at 100-24+         Gn 4.0 ->  +0-03+ to 101-02

Fn 4.5 ->  -0-03+ to 102-03+         Gn 4.5 ->  -0-03 to 102-25+

Fn 5.0 ->  -0-03 to 102-30             Gn 5.0 ->  -0-03+ to 103-18

Fn 5.5 ->  -0-03 to 103-11+           Gn 5.5 ->  -0-08 to 103-25

Fn 6.0 ->  +0-01+ to 103-24          Gn 6.0 ->  -0-01+ to 103-28+

AT JASON WILBORN'S (WAR ROOM PARTICIPANT) REQUEST WE DID THE CHARTS IN PINK TONIGHT...HIS FAVORITE COLOR IS PINK.

 YOU'RE WELCOME JASON!

In terms of your rate sheet outlook...we feel like the MBS is stuck. The entire stack is trading at premiums and the prepayment outlook is a mystery. So we expect to see profit taking and periods of  "up in coupon" buying until lenders can offer up better rates to borrowers. We do however expect bids to heat up on any weakness, the Fed is everpresent! Again...we feel like the MBS stack is stuck in the mud which should lead to a tighter range of pricing on rate sheets. Therefore lock/float strategies should be based on a 4-5 day period.

For Extra Credit...What movie did I quote in the blog post title?