MBS Pricing Snapshot

The overnight session was largely uneventful for bond markets despite volatility in equities. This is very much in line with yesterday's session where MBS and Treasuries marched to their own tune while stock markets chopped around in grander fashion. The conclusion is that bond markets are most focused on the central bank meetings in the days ahead rather than the slew of economic data out of the Euro zone overnight

The same theme continues to play out in the domestic session where 10yr yields have essentially held between 1.47 and 1.48 all morning despite S&P futures chopping between 1383 and 1378, not to mention the advancing Euro.

We can probably credit much of this resilient determination in bond markets to a simple game of follow-the-leader with German Bunds. As is the case most mornings, they've been tightly connected and Bunds are drawing additional strength on overnight news that an ESM Banking license isn't even being considered. This was one of the possibilities for Thursday's ECB announcement, and although we'd never assume that something is true in the Euro zone simply because one person/party/organization says it is, it's still a net positive for bond markets.

The domestic economic data has just now passed without a trace in bond markets and the same theme of "choppier equities by comparison" is ongoing after S&Ps hit their lows of the morning following Consumer Confidence.

All of the above leaves MBS in great shape vs yesterday and arguably terrific shape vs the more disconcerting moments late last week. Fannie 3.0's are up 4 ticks on the day and have made it back to the 104-00 handle, even if only just. Fannie 3.5's are also back over 106-00, currently up 2 ticks at 106-02.

There's no more significant scheduled economic data today though that's no guarantee of calm movements. Markets have a lot to consider ahead of the impending central bank meetings/announcements, as well as Friday's NFP. In addition, today is "month-end" which can create a fair amount of trading motivation in its own right. Thankfully, that motivation tends to err on the side of positivity for bond markets, all other things being equal.

The Conference Board Consumer Confidence Index®, which had declined in June, improved slightly in July. The Index now stands at 65.9 (1985=100), up from 62.7 in June. The Expectations Index improved to 79.1 from 73.4. The Present Situation Index, however, decreased slightly to 46.2 from 46.6 a month ago.

The monthly Consumer Confidence Survey®, based on a probability-design random sample, is conducted for The Conference Board by Nielsen, a leading global provider of information and analytics around what consumers buy and watch. The cutoff date for the preliminary results was July 19.

Says Lynn Franco, Director of Economic Indicators at The Conference Board: "Despite this month's improvement in confidence, the overall Index remains at historically low levels. Consumers' attitude regarding current conditions was little changed in July, but their short-term expectations, which had declined last month, bounced back. However, while consumers expressed greater optimism about short-term business and employment prospects, they have grown more pessimistic about their earnings. Given the current economic environment — in particular the weak labor market — consumer confidence is not likely to gain any significant momentum in the coming months."

- Chicago PMI 53.7 vs 52.5 consensus. 52.9 June
- Employment Component down to 53.3 vs 60.4 last time.
- Production Index 54.5 vs 57.0 last time
- most other components were close to or slightly better than the previous report

The Chicago Purchasing Managers reported the ]uly Chicago Business Barometer gained incrementally while the short- term trend of the Chicago Business Barometer fell for the fourth month. Gains in New Orders and Order Backlogs were offset by weakness in Production, Employment and Supplier Deliveries. The three month moving average on all Business Activity indexes fell in ]uly.

BUSINESS ACTIVITY!

- EMPLOYMENT Index continued to grow at a slow pace;
- NEW ORDERS recovered mildly from ]une’s 33 month low;
- ORDER BACKLOGS moved from contraction to expansion.

Data through May 2012, released today by S&P Dow Jones Indices for its S&P/Case-Shiller Home Price Indices, the leading measure of U.S. home prices, showed that average home prices increased by 2.2% in May over April for both the 10- and 20-City Composites.

With May’s data, we found that home prices fell annually by 1.0% for the 10-City Composite and by 0.7% for the 20-City Composite versus May 2011. Both Composites and 17 of the 20 MSAs saw increases in annual returns in May compared to April. Boston, Charlotte and Detroit were the three cities that saw their annual returns worsen in May, with annual rates of -0.1%, +0.9% and +0.6%, respectively. Atlanta continues to be the only city posting a double-digit negative annual return with -14.5%. However, this is an improvement over the -17.0% annual decline recorded in April 2012. All 20 cities and both Composites posted positive monthly returns. No cities posted new lows in May 2012.

“With May’s data, we saw a continuing trend of rising home prices for the spring,” says David M. Blitzer, Chairman of the Index Committee at S&P Dow Jones Indices. “On a monthly basis, all 20 cities and both Composites posted positive returns and 17 of those cities saw those rates of change increase compared to what was observed for April. Seventeen of the 20 cities and both Composites also saw improved annual rates of return. We have observed two consecutive months of increasing home prices and overall improvements in monthly and annual returns; however, we need to remember that spring and early summer are seasonally strong buying months so this trend must continue throughout the summer and into the fall.

* June Personal Spending +0.0 vs +0.1 Consensus
* Personal Income +0.5 pct vs +0.4 pct consensus
* Core PCE Price Index +0.2 pct, as expected.

Personal income increased $61.8 billion, or 0.5 percent, and disposable personal income (DPI) increased $52.4 billion, or 0.4 percent, in June, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) decreased $1.3 billion, or less than 0.1 percent. In May, personal income increased $39.0 billion, or 0.3 percent, DPI increased $31.7 billion, or 0.3 percent, and PCE decreased $13.3 billion, or 0.1 percent, based on revised estimates.

Real disposable income increased 0.3 percent in June, compared with an increase of 0.5 percent in May. Real PCE decreased 0.1 percent, in contrast to an increase of 0.1 percent.