After retail sales shook things up surprisingly little, MBS and TSYs saw some very small gains heading into Consumer Sentiment. The historically low reading on the report helped bonds achieve further gains, but they've all come at a strikingly calm and measured pace. 10yr notes are down to 2.249, about 8.5 bps lower on the day. Fannie 4.0's are up 18 ticks on the day at 104-10 and 3.5's are up 23 ticks at 101-07. That also puts the spread between the two MBS coupons at just over 3 pts, right within the striking distance for more 3.5 originations today. There's no more scheduled economic data today. If gains hold here or continue, you might see a reprice for the better from a lender who doesn't need to control inbound lock volume. Erratic and unpredictable reprice behavior remains a risk due to lock volume.

(Reuters) - U.S. consumer sentiment dropped to its lowest point in more than three decades in early August, as fears of a stalled recovery gelled with despair over government policies, a survey released on Friday showed. The Thomson Reuters/University of Michigan's preliminary August reading on the overall index on consumer sentiment came in at 54.9, the lowest since May 1980, down from 63.7 in July. It was well below the the median forecast of 63.0 among economists polled by Reuters. High unemployment, stagnant wages and the protracted debate over raising the U.S. government debt ceiling spooked consumers,polled before the downgrade of U.S. sovereign debt by Standard &Poor's. "Never before in the history of the surveys have so many consumers spontaneously mentioned negative aspects of the government's role," survey director Richard Curtin said in a statement. The survey's gauge of consumer expectations slipped to 45.7, also the lowest since May of 1980, from July's 56.0 and below a predicted reading of 55.3. The Obama administration received poor ratings from 61 percent of respondents, the worst showing among all prior heads of state. "This was more than the simple recognition that traditional monetary and fiscal policy measures were largely spent; it was the realization that the government was unable or unwilling to act," Curtin added. Two-thirds of all consumers reported that the economy had recently worsened, and just one-in-five anticipated any gains during the year ahead. Bad times in the economy were expected by 75 percent of all consumers in early August, just below the all-time peak of 82 percent in 1980. The survey's barometer of current economic conditions was 69.3 in August, down versus 75.8 in July and below a forecast of 74.3.. The survey's one-year inflation expectation remained stuck at 3.4 percent, while the five-to-10-year inflation outlook also flatlined at 2.9 percent in August.

(Minneapolis Fed Website) I dissented from this change in language because the evolution of macroeconomic data did not reflect a need to make monetary policy more accommodative than in November 2010. In particular, personal consumption expenditure (PCE) inflation rose notably in the first half of 2011, whether or not one includes food and energy. At the same time, while unemployment does remain disturbingly high, it has fallen since November. I can summarize my reasoning as follows. I believe that in November, the Committee judiciously chose a level of accommodation that was well calibrated for the prevailing economic conditions. Since November, inflation has risen and unemployment has fallen. I do not believe that providing more accommodation—easing monetary policy—is the appropriate response to these changes in the economy. Going forward, my votes on monetary policy will continue to be based on the evolution of the data on PCE inflation and its components, medium-term PCE inflation expectations, and unemployment.

Even though volume and volatility were historically high overnight, it was one of the slowest nocturnal sessions this week. The major news seems to be a ban on short-selling in France, Greece, Italy, and Spain, which, as one might assume, gave somewhat of a boost to equities and some pause to improvements in Treasuries. Before the announcement 10yr notes made it to 2.246 and are currently at 2.288 having expressed little reaction to Retail Sales Data. MBS are up 8 ticks in 4.0 coupons to 104-00 and 11 ticks in 3.5 coupons to 100-27. 3.5's had their best day of originations yesterday and almost cracked the 100 million dollar level. (total fixed rate originations were around 3.5 billion, with a "B,"). But even though 3.5's still don't have enough market share to take the title belt from 4.0's, they're moving in the right direction, only outpaced 5 to 1 yesterday. So far, markets are trading in fairly logical extensions of their overnight patterns. If that continues, rate sheets might not be as delayed as they have been on other days this week.

(Reuters) - U.S. retail sales in July posted their biggest gain since March, tempering fears that the world's largest economy might be slipping back into recession. Sales climbed 0.5 percent, in line with analyst forecasts and following an upwardly revised 0.3 percent gain in June. Consumer spending accounts for two thirds of U.S. economic activity, and the Commerce Department data indicates the third quarter was off to a decent start. Excluding autos, sales increased 0.5 percent, well above forecasts for a 0.2 percent gain. The figures were bolstered by a 1.6 percent jump in gasoline station sales, in part reflecting the higher cost of fuel. U.S. economic growth was anemic in the first half of the year and unemployment remained elevated, raising worries that the recovery might again falter and triggering speculation that the Federal Reserve might need to resort to additional monetary easing. (Reporting by Pedro Nicolaci da Costa; Editing by Andrea Ricci)