Treasuries were stone silent during Asian hours, holding inside an impressively narrow half bp range (2.185-2.19) despite a 200pt swing in the Nikkei and moderate movement elsewhere. Granted a 200pt sell-off and rally in the Nikkei is just another day at the office for Japanese stock markets, but if you needed any reassurance that US Bond Markets are marching to the beat of their own drum, there's another nugget.

With the onset of the European session, Treasuries did give a small amount of chase to German Bund movements on the heels of a strong auction, but all told, global markets watch and take direction from the US, not the other way around. As such, global markets are generally subdued as we wait for this afternoon's FOMC events (starting at 2pm Eastern).

10's managed to eke out a bp and a half of improvement, currently bouncing along 2.167 (2.173 currently) and Fannie 3.5s are grinding super sideways at 103-12. Equities are in line with yesterday's latest levels after modest overnight volatility (7 point range, give or take, for S&P's). There's no significant data this morning, and all eye are on the Fed this afternoon. (hide)

After rallying directionally from 11am, both Treauries and MBS have broken from those trends and gone sideways into 3pm. To be sure, some positive reprices may still be out there, but if you've already seen one, this is sort of a heads-up that you're not likely to see another one from the same lender. Also bear in mind that some lenders (only a select few, really) have been known to reprice negatively on afternoons like this where we've rallied for most of the day and begin drifting off into the close.

Whatever the case, Fannie 3.5s are back down to 103-09, getting closer to the 103-07 / 103-08 pivot zone. 10's are back into negative territory, up less than a bp at 2.187, but looking like they want to break higher. "Stay frosty" = stay cautious if you need to be. No negative reprice risk yet based on price levels, but the rally is over and the sideways grind is at risk of slipping a bit. (hide)

The 103-07 to 103-08 zone held up as resistance to multiple attempts to move higher before finally giving way just before 2pm. As we noted, this is a level that has been clearly more likely to cause bounces than allow breaks, and today is no exception (only 1 break vs too many bounces to count). As such, trading activity picked up in MBS shortly after the break and prices followed through into higher territory. Staying in that territory for more than a few minutes has allowed for widespread positive reprices.

The "zone" now serves the opposite role, where it's more likely to act as support vs falling prices. If it's broken again, that would be the cue to lock em up for the day (if you're planning on locking or not otherwise doing so after this batch of reprices). (hide)

Although we do have one report of a positive reprice, MBS will be hard pressed to maintain (or improve to) levels that suggest more of the same. Not only does tomorrow's important data suggest caution among lenders, but price levels themselves are just now getting back to that important pivot zone in Fannie 3.5s (103-07 to 103-08). These price levels have been more likely to result in bounces vs breaks when approached from either direction of late (though breaks obviously CAN happen).

Even if it does happen, we seem to be encountering resistance to the idea so far while 10's similarly struggle with a meaningful break into the 2.17's (stuck at 2.18-ish right now).

There is no significant news or data motivating the return to unchanged levels for bond markets, but the juxtaposition of rising stock prices implies the possibility that we're simply seeing some cash come off the sidelines whereas yesterday afternoon's FT article may have had the opposite effect. (hide)

Treasuries traded in a narrow sideways range during Asian hours despite an initial move higher in the Nikkei and Dollar/Yen. German Bunds had a bit of catching up to do with respect to yesterday afternoon's sell-off in Treasuries or they were simply responding to a slightly better-than-expected sentiment survey (or maybe both). Either way, Bund yields rose and Treasury yields followed.

All in all, the moves were moderate, but persistently weak. 10's were up near 2.2 by the start of the domestic session and remained under pressure through the uneventful 8:30am data. After topping out at just under 2.22, 10's are currently trading around 2.205

Fannie 3.5's opened 3-4 ticks weaker and shed a few more in concert with Treasury weakness. Fannie 3.5s have been trading flat around 103-03 since hitting lows of 103-02 just before data. Equities are almost perfectly in line with yesterday's 4pm levels according to Futures, but have been trending lower since 8:20am. With no remaining economic data today, markets will be "trading it out" ahead of the Fed tomorrow.

In other words, any movement we see is dependent on how trade flows shape up. All things being equal there isn't much motivation to move directionally as most position squaring was taken care of before yesterday afternoon's FT headline shook things up. (hide)

- Consumer Price Index +0.1495 vs +0.2 pct forecast
- Core CPI +0.1666 vs +0.2 pct forecast
- Consumer "real earnings" -0.1 pct

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.1 percent in May on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.4 percent before seasonal adjustment.

The shelter index rose 0.3 percent and accounted for more than half of the seasonally adjusted all items increase in May. The energy index rose modestly, with the gasoline index flat but increases in the electricity and natural gas indexes accounting for the rise. The food index, however, turned down in May, with the food at home index falling 0.3 percent.

The index for all items less food and energy increased 0.2 percent in May. Besides the shelter increase, advances in the indexes for airline fares, recreation, and apparel also contributed to the rise. In contrast, the indexes for medical care and used cars and trucks declined in May.

The all items index increased 1.4 percent over the last 12 months, an increase from last month's 1.1 percent figure. The 12-month change in the index for all items less food and energy remained at 1.7 percent. The food index has risen modestly over the last 12 months, advancing 1.4 percent, while the index for energy has declined, falling 1.0 percent. (hide)

- Starts 914k vs 950k consensus, 856k previously
- Permits 974k vs 975k consensus, 1.005m previously
- Multifamily Starts up 21.6 pct, Single Fam up 0.3 pct
- Single Fam permits highest since May 2008

The U.S. Census Bureau and the Department of Housing and Urban Development jointly announced the following new residential construction statistics for May 2013:

BUILDING PERMITS
Privately-owned housing units authorized by building permits in May were at a seasonally adjusted annual rate of 974,000. This is 3.1 percent (±0.9%) below the revised April rate of 1,005,000, bu t is 20.8 percent (±1.3%) above the May 2012 estimate of 806,000.

Single-family authorizations in May were at a rate of 622,000; this is 1.3 percent (±1.1%) above the revised April figure of 61 4,000. Authorizations of units in buildings with five units or more were at a rate of 325,000 in May.

HOUSING STARTS
Privately-owned housing starts in May were at a seasonally adjusted annual rate of 914,000. This is 6.8 percent (±10.1%)* above the revised April estimate of 856,000 and is 28.6 percent (±14.4%) above the May 2012 rate of 711,000.

Single-family housing starts in May were at a rate of 599,000; this is 0.3 percent (±8.7%)* above the revised April figure of 5 97,000. The May rate for units in buildings with five units or more was 306,000 (hide)

Treasuries were stone silent during Asian hours, holding inside an impressively narrow half bp range (2.185-2.19) despite a 200pt swing in the Nikkei and moderate movement elsewhere. Granted a 200pt sell-off and rally in the Nikkei is just another day at the office for Japanese stock markets, but if you needed any reassurance that US Bond Markets are marching to the beat of their own drum, there's another nugget.

With the onset of the European session, Treasuries did give a small amount of chase to German Bund movements on the heels of a strong auction, but all told, global markets watch and take direction from the US, not the other way around. As such, global markets are generally subdued as we wait for this afternoon's FOMC events (starting at 2pm Eastern).

10's managed to eke out a bp and a half of improvement, currently bouncing along 2.167 (2.173 currently) and Fannie 3.5s are grinding super sideways at 103-12. Equities are in line with yesterday's latest levels after modest overnight volatility (7 point range, give or take, for S&P's). There's no significant data this morning, and all eye are on the Fed this afternoon. (hide)

After rallying directionally from 11am, both Treauries and MBS have broken from those trends and gone sideways into 3pm. To be sure, some positive reprices may still be out there, but if you've already seen one, this is sort of a heads-up that you're not likely to see another one from the same lender. Also bear in mind that some lenders (only a select few, really) have been known to reprice negatively on afternoons like this where we've rallied for most of the day and begin drifting off into the close.

Whatever the case, Fannie 3.5s are back down to 103-09, getting closer to the 103-07 / 103-08 pivot zone. 10's are back into negative territory, up less than a bp at 2.187, but looking like they want to break higher. "Stay frosty" = stay cautious if you need to be. No negative reprice risk yet based on price levels, but the rally is over and the sideways grind is at risk of slipping a bit. (hide)

The 103-07 to 103-08 zone held up as resistance to multiple attempts to move higher before finally giving way just before 2pm. As we noted, this is a level that has been clearly more likely to cause bounces than allow breaks, and today is no exception (only 1 break vs too many bounces to count). As such, trading activity picked up in MBS shortly after the break and prices followed through into higher territory. Staying in that territory for more than a few minutes has allowed for widespread positive reprices.

The "zone" now serves the opposite role, where it's more likely to act as support vs falling prices. If it's broken again, that would be the cue to lock em up for the day (if you're planning on locking or not otherwise doing so after this batch of reprices). (hide)

Although we do have one report of a positive reprice, MBS will be hard pressed to maintain (or improve to) levels that suggest more of the same. Not only does tomorrow's important data suggest caution among lenders, but price levels themselves are just now getting back to that important pivot zone in Fannie 3.5s (103-07 to 103-08). These price levels have been more likely to result in bounces vs breaks when approached from either direction of late (though breaks obviously CAN happen).

Even if it does happen, we seem to be encountering resistance to the idea so far while 10's similarly struggle with a meaningful break into the 2.17's (stuck at 2.18-ish right now).

There is no significant news or data motivating the return to unchanged levels for bond markets, but the juxtaposition of rising stock prices implies the possibility that we're simply seeing some cash come off the sidelines whereas yesterday afternoon's FT article may have had the opposite effect. (hide)

Treasuries traded in a narrow sideways range during Asian hours despite an initial move higher in the Nikkei and Dollar/Yen. German Bunds had a bit of catching up to do with respect to yesterday afternoon's sell-off in Treasuries or they were simply responding to a slightly better-than-expected sentiment survey (or maybe both). Either way, Bund yields rose and Treasury yields followed.

All in all, the moves were moderate, but persistently weak. 10's were up near 2.2 by the start of the domestic session and remained under pressure through the uneventful 8:30am data. After topping out at just under 2.22, 10's are currently trading around 2.205

Fannie 3.5's opened 3-4 ticks weaker and shed a few more in concert with Treasury weakness. Fannie 3.5s have been trading flat around 103-03 since hitting lows of 103-02 just before data. Equities are almost perfectly in line with yesterday's 4pm levels according to Futures, but have been trending lower since 8:20am. With no remaining economic data today, markets will be "trading it out" ahead of the Fed tomorrow.

In other words, any movement we see is dependent on how trade flows shape up. All things being equal there isn't much motivation to move directionally as most position squaring was taken care of before yesterday afternoon's FT headline shook things up. (hide)

- Consumer Price Index +0.1495 vs +0.2 pct forecast
- Core CPI +0.1666 vs +0.2 pct forecast
- Consumer "real earnings" -0.1 pct

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.1 percent in May on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.4 percent before seasonal adjustment.

The shelter index rose 0.3 percent and accounted for more than half of the seasonally adjusted all items increase in May. The energy index rose modestly, with the gasoline index flat but increases in the electricity and natural gas indexes accounting for the rise. The food index, however, turned down in May, with the food at home index falling 0.3 percent.

The index for all items less food and energy increased 0.2 percent in May. Besides the shelter increase, advances in the indexes for airline fares, recreation, and apparel also contributed to the rise. In contrast, the indexes for medical care and used cars and trucks declined in May.

The all items index increased 1.4 percent over the last 12 months, an increase from last month's 1.1 percent figure. The 12-month change in the index for all items less food and energy remained at 1.7 percent. The food index has risen modestly over the last 12 months, advancing 1.4 percent, while the index for energy has declined, falling 1.0 percent. (hide)

- Starts 914k vs 950k consensus, 856k previously
- Permits 974k vs 975k consensus, 1.005m previously
- Multifamily Starts up 21.6 pct, Single Fam up 0.3 pct
- Single Fam permits highest since May 2008

The U.S. Census Bureau and the Department of Housing and Urban Development jointly announced the following new residential construction statistics for May 2013:

BUILDING PERMITS
Privately-owned housing units authorized by building permits in May were at a seasonally adjusted annual rate of 974,000. This is 3.1 percent (±0.9%) below the revised April rate of 1,005,000, bu t is 20.8 percent (±1.3%) above the May 2012 estimate of 806,000.

Single-family authorizations in May were at a rate of 622,000; this is 1.3 percent (±1.1%) above the revised April figure of 61 4,000. Authorizations of units in buildings with five units or more were at a rate of 325,000 in May.

HOUSING STARTS
Privately-owned housing starts in May were at a seasonally adjusted annual rate of 914,000. This is 6.8 percent (±10.1%)* above the revised April estimate of 856,000 and is 28.6 percent (±14.4%) above the May 2012 rate of 711,000.

Single-family housing starts in May were at a rate of 599,000; this is 0.3 percent (±8.7%)* above the revised April figure of 5 97,000. The May rate for units in buildings with five units or more was 306,000 (hide)

Robin Harding is the FT's version of WSJ's Hilsenrath, and some would argue a more credible one at that. Whereas Hilsenrath was out on May 10th with a piece that was generally "pro-tapering," and then out again last Thursday with a sort of "yeah but" piece regarding the Fed Funds Rate portion of monetary policy, Harding seems to have re-grounded the discussion this afternoon.

There's nothing new offered by the FT piece, but it's all about that "re-grounding" of the discussion. Harding points out the fact that Payrolls were averaging 130k in the 6 months running up to QE3 and have averaged 194k in the past 6 months, also making note of the decreased volatility (which has been one of our most important observations about the most recent NFP, in that it further smoothed out volatility in the data-set).

The less mainstream suggestion is that the current level of job growth may be just fine for the Fed considering recent research suggests the participation rate might not bounce back as quickly as initially thought. This is a reiteration of the warnings offered on MBS Live after the last NFP when we addressed the "myth" of a 200k line of demarcation between insufficient and substantial growth needed to trigger a reduction in Fed asset purchases.

Harding's conclusion is that the Fed intends to fire a warning shot of sorts, but not to bombard markets with ongoing tapering unless the recently steady--if tepid--pace of improvement can be sustained. Said warning shot is unfortunately vague: "Ben Bernanke is likely to signal that the US Federal Reserve is close to tapering down its $85bn-a-month in asset purchases when he holds a press conference on Wednesday, but balance that by saying subsequent moves depend on what happens to the economy."

This one seems to have made the rounds fairly quickly and was immediately latched onto by bored, flat markets shortly after it's 2pm print time. The extreme lack of volume, the 2 and a half days of gains for bond markets, and concurrent comments from the G8 summit give the illusion of an oversized reaction to news that isn't really new. In the grand scheme of things, those three factors precipitated a modest pre-FOMC bounce, very much contained by recent trends. They've done nothing to alter the bigger picture or create any change in prevailing momentum (which continues to be sideways). (hide)

Trading activity continues to be muted at best with 3.5s well contained between 103-17 and 103-14+. While MBS haven't fallen past the day's previous lows, they're back in line with them. At the same time, 10yr yields are near their highs. Combine this with recently higher likelihoods of afternoon shakiness and it's potentially worth increasing one's level of vigilance.

More simply put, there's no negative reprice risk now, but if that's going to change, this is the first chance in about 3 hours. Stay tuned. (hide)

Treasury yields were heading into 10am NAHB data at 2.13 (10yr) and are now up to 2.1475. Fannie 3.5 MBS fell 2 ticks to 103-15. This moderate weakness is in response to a much stronger than expected Housing Market Index from the National Association of Homebuilders (NAHB). The main index moved over 50 (anything over 50 is positive territory) for the first time since 2006.

The report isn't typically a reliable market mover, but can have this sort of impact when the headline is this far from consensus (52 vs 45). So far, we're still inside the lows of this morning's trading range in MBS and wouldn't be expecting negative reprice risk unless we fell several more ticks.

To be sure, this is still a risk given the technical break higher in 10yr yields (had been holding at 2.145 and just moved up to 2.15). We may not have seen the move play out in full yet. (hide)

- Headline Index at 52 vs 45 consensus, 44, previously
- Current Single-Fam Sales 56 vs 48 previously
- Prospective Buyers 40 vs 33 previously
- 6-mo Outlook 61 vs 52 previously

Market Reaction: Treasury yields spiking moderately. Only 1-2 ticks weaker in MBS so far.

Builder confidence in the market for newly-built single-family homes hit a significant milestone in June, surging eight points to a reading of 52 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) released today. Any reading over 50 indicates that more builders view sales conditions as good than poor.

“This is the first time the HMI has been above 50 since April 2006, and surpassing this important benchmark reflects the fact that builders are seeing better market conditions as demand for new homes increases,” said NAHB Chairman Rick Judson, a home builder and developer from Charlotte, N.C. “With the low inventory of existing homes, an increasing number of buyers are gravitating toward new homes.”

The eight-point jump in the index was the biggest one-month gain since August and September of 2002, when the HMI recorded a similar increase of eight points.

“Builders are experiencing some relief in the headwinds that are holding back a more robust recovery,” said NAHB Chief Economist David Crowe. “Today’s report is consistent with our forecast for a 29 percent increase in total housing starts this year, which would mark the first time since 2007 that starts have topped the 1 million mark.” (hide)

10yr Treasuries had a relatively docile night in terms of volume and volatility--both showing up in less-than-average amounts. Indeed Friday already spoke to the likelihood that traders were hunkered down for the upcoming FOMC Events with similarly moderate, sideways movement in similarly light volume.

Asian hours saw yields open just slightly higher, but they held perfectly flat despite advancing equities and Dollar/Yen. The European session had a more noticeable effect, with the Bundesbank saying that Germany's economic growth is likely to fall over the summer. This ushered Bund yields quickly lower, and helped Treasuries facilitate a move to their lowest yields of the morning right as the domestic session began.

10's hit 8am at 2.112, whereupon traders with short term bets on lower yields sold to book profits. Yields rose to 2.14 right at the 8:30am release of the Empire State Manufacturing data. The stronger-than-expected headline stood the chance of motivating more weakness, but the internal components of the report were lackluster at best. This offset any bearish bias coming out of the report and suggested more of a sideways reaction.

Since the report, that's more or less what we've seen with 10's staying between 2.14 and 2.125, currently 2.131. Fannie 3.0s are 1 tick higher on the day at 103-17 and haven't strayed more than 2 ticks lower than that. Equities futures are off their overnight highs but appreciably higher vs Friday's close (over 12 points in S&P Futures). The only remaining data this morning is NAHB's Housing Market Index at 10am (hide)

- Headline index +7.84 vs 0.0 forecast
- Employment Index 0.0 vs +5.68 previously
- New Orders -6.69 vs -1.17 previously

The June 2013 Empire State Manufacturing Survey indicates that conditions for New York manufacturers improved modestly. The general business conditions index—the most comprehensive of the survey's measures—rose nine points to 7.8. Nevertheless, most other indicators in the survey fell. The new orders index slipped six points to -6.7, the shipments index fell twelve points to -11.8, and the unfilled orders index fell eight points to -14.5. The prices paid index held steady at 21.0, while the prices received index rose seven points to 11.3. Labor market conditions worsened, with the index for number of employees dropping to zero and the average workweek index retreating ten points to -11.3. Continuing the trend seen in the past few months, indexes for the six-month outlook declined, suggesting that optimism about future conditions was weakening further.

In a series of supplementary survey questions, manufacturers were asked to look back and assess the short-term and medium-term effects of Superstorm Sandy on their business. As in last November’s survey (conducted immediately after the storm), the vast majority of upstate firms said that they were essentially unaffected by the storm. However, firms in New York City, Long Island, and the Lower Hudson Valley reported that it took an average of more than two weeks after the storm for business to get back to normal, and more than a third of these firms said that the storm had adversely affected their overall business revenue during the seven months since Sandy. (hide)

While the headline index of the Consumer Sentiment report came in at 82.7, weaker than the expected 84.5, the relatively important "expectations" component rose from 75.8 to 76.7, it's highest level since November. Move out further, and expectations improved more, with the 12-month outlook rising from 100 to 102.

This isn't enough to offset the other weak components in the report, but it highlights the effects of "current conditions" as the primary detractor at 92.1 vs 98.0 last time (consensus 96.0 today).

Consumer inflation expectations were also slightly higher, rising 0.1 in both 1 and 5yr time frames. That doesn't do much to help or hurt, but it's not bond-market positive, at least. That said, the report as a whole is even more clearly "not negative" for bond markets, which is turning out to be just as good as positive news at the moment. (hide)

Given the hullabaloo caused by yesterday's Hilsenrath article, Treasuries kicked off the overnight session trading almost perfectly flat until European hours. The same was true for equities futures (though those remained perfectly flat all night (ok, so 3 points range in S&P).

This isn't much of a surprise considering the thrust of the article was to edify that which is already known: the Fed isn't raising short term borrowing rates any time soon. This was perhaps the biggest "no duh" of any headline that 's ever caused a lightning quick 4bp rally in Treasuries, or at least that would have been a safe assumption considering the fact that tapering has nothing to do with the Fed Funds Rate, the latter being tied to thresholds mentioned in the policy text and not seen changing until 2014 or 2015 according to Fed forecasts.

But if you click through the various Treasury charts on the dashboard, you'll see that shorter maturities clearly had the more pronounced reaction to the story, indicating that markets actually didn't simply mistake the headline for a comment on tapering prospects (again, tapering ≠ rate hikes). Further evidence that tapering wasn't inferred came courtesy of Yen trading levels which kept on truckin' higher (weaker) yesterday afternoon and didn't trade stronger until Asian markets opened--even then never moving past levels seen before the Hilsenrath article.

So the reaction in Treasuries remains a bit confusing. More appropriately, it's downright alarming that it had any effect on Fed Funds Rate expectations (which have been under no threat, relative to asset purchases)--tacitly suggesting markets are having a hard time distinguishing the two decidedly discreet components of "accommodative policy." There's low rate accommodation and asset purchase accommodation. One of these things is not like the other, but apparently that's news to market participants, and that has scary implications for volatility.

Value judgments are moot, however. Treasuries may have traded sideways during Asian hours, but stocks are in line with pre-Hilsenrath levels. Markets have spoken, and that correlation along with Japan's reaction tells us the "low rates" issue was actually an issue. 10yr yields improved as money flowed into both sides of the market in European hours, before flattening out heading into domestic hours.

That's afforded and MBS open just a few ticks higher than yesterday's close, and a measured rally higher since then. Fannie 3.5s are up 9 ticks at 103-22 now--their best levels of the week. 10's are at their lows of the week as well, down 2.7 bps at 2.124. Equities are consolidating a choppy narrow range just under yesterday's closing levels, and we find ourselves waiting for Consumer Sentiment data as the ostensible gateway drug to a more hardcore retracement in bond markets (previous range centers on 2.10 in 10's and has resistance at 2.07). We'd need an awesomely bad sentiment reading for such things though. (hide)

- PPI +0.5 vs +0.1 consensus, -0.7 previously
- CORE PPI + 0.1 vs +0.1 cons, +0.1 prev.
- Annual Core +1.7 vs +1.7 previously

The Producer Price Index for finished goods rose 0.5 percent in May, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. Prices for finished goods fell 0.7 percent in April and 0.6 percent in March. At the earlier stages of processing, prices received by manufacturers of intermediate goods declined 0.1 percent in May, and the crude goods index advanced 2.2 percent. On an unadjusted basis, prices for finished goods moved up 1.7 percent for the 12 months ended May 2013. (hide)

- Trade Gap $106.1 bln vs $109.7 bln forecast

The U.S. current-account deficit—the combined balances on trade in goods and services, income, and net unilateral current transfers—increased to $106.1 billion (preliminary) in the first quarter of 2013 from $102.3 billion (revised) in the fourth quarter of 2012. The increase in the current-account deficit was accounted for by a decrease in the surplus on income and an increase in outflows of net unilateral current transfers, such as government grants, government pensions, and private remittances. These changes were partly offset by a decrease in the deficit on goods and an increase in the surplus on services. (hide)