MBS Pricing Snapshot

While MBS and Treasuries gapped to weaker territory following the Fiscal Cliff stop-gap deal on the year's first trading session, the bigger swings to the downside were on subsequent sessions. These came courtesy of the much-maligned FOMC Minutes and a moderately bullish Employment Situation report.

While it's too late for those developments to avoid suggesting a longer term trend of rising yields, those sharp moves have progressively been made to look like the upper limits of that longer term range with subsequent "ratcheting" to better and better levels. The ratcheting continued overnight as Tokyo was back in action after yesterday's market holiday. Asian markets were tepid, but positive for US Treasuries to kick off the overnight session, and Europe maintained a supportive backdrop into the domestic session.

Stateside, the morning opened with a speech from Boston Fed's Rosengren, now a voter for 2013, who couldn't have been more clear in saying "Continued monetary accommodation is absolutely appropriate and indeed needed as long as we are projected to miss on both elements of the Fed’s dual mandate, inflation and employment." In later Q&A, he said he didn't expected to be at the point of exiting an accommodative policy stance for "most of the year."

Economic data was plentiful at 8:30, with Retail Sales leading the way. The stronger than expected headline there initially provided for a microscopic move higher in yield and equities futures, but the internals of the report suggested that much of the "beat" was driven by Autos and Gas (in fact, excluding those two, the report was right on target).

Combining those "yeah buts" on Retail Sales with the much weaker than expected Empire State Manufacturing Survey and unimportant Producer Price Index, and bond markets edged tot heir best levels of 2013, though still face an appreciable gap to get back to December 31st territory. Fannie 3.0s are up 6 ticks on the session at 104-18 and 10yr yields are down more than 3bps from 5pm levels to 1.8149.

Equities markets opened in weaker territory with S&Ps down about 5 points from yesterday's close, but have been ticking very slightly higher in the first few minutes of the cash open for stocks. We'd also note that Bernanke's speech last night offered no new points of view from the Fed Chairmen, which is exactly what bond markets needed to hear. In the absence of a firm push back against recent concerns stemming from the recent FOMC Minutes, Bernanke's equanimity regarding the necessity and appropriateness of quantitative easing, combined with assurances that the Fed knows how to exit when the time is right, helped the slow and steady overnight improvements. It also potentially adds to the positive backdrop this morning and does so in such a way that markets haven't had a major reactionary shift following his speech. Having had a chance to pile on to recent concerns about the QE discontinuation outlook, Bernanke simply stepped out of the way rhetorically, effectively saying "as you were" to bond markets.

- PPI -0.2 pct vs -0.1 pct consensus
- Labor dept. says most of decline due to food prices
- excluding food/energy, "core PPI" +0.1 vs +0.1 consenus
- 2012 Core PPI +2.0 vs +2.1 Consensus
- Inflation is not currently an issue for markets and the Price Index reports have not been market movers for quite some time. This could change when inflation starts picking up, but until then, PPI and CPI are overlooked in favor of other economic metrics.

The Producer Price Index for finished goods declined 0.2 percent in December, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. Prices for finished goods fell 0.8 percent in November and 0.2 percent in October. At the earlier stages of processing, prices received by manufacturers of intermediate goods moved up 0.3 percent, and the crude goods index increased 2.5 percent. On an unadjusted basis, the finished goods index rose 1.3 percent in 2012, compared with a 4.7-percent advance in 2011.

- Empire State Index -7.78 vs +0.00 Consensus
- Employment -4.3 vs -9.68 in Dec
- New Orders -7.18 vs -3.44 in Dec
- Prices Paid 22.58 vs 16.13 in Jan
- Economists initially expected a slightly higher than breakeven reading on this one (+0.2), but the consensus recently came down to +0.00. Either of those figures would have ended a 5 month stint in negative territory, so today's additional ugly reading of -7.78 with no marked revision to last month's crappy numbers is sufficiently bearish enough to help the case against reading much economic positivity into the slightly stronger Retail Sales numbers. A supporting actor, to be sure, but helpful.

The January 2013 Empire State Manufacturing Survey indicates that conditions for New York manufacturers continued to decline at a modest pace. The general business conditions index was negative for a sixth consecutive month and, at -7.8, was little changed from its recent readings. The new orders index fell four points to -7.2, and the shipments index declined a full fi fteen points to -3.1. Price increases picked up, with the prices paid index rising six points to 22.6 and the prices received index rising ten points to 10.8, the highest readings for both of these indexes in several months. Labor market conditions remained weak, with the indexes for both the number of employees and the average workweek remaining below zero for a fourth month in a row. The level of optimism about the six-month outlook rose somewhat from December, but remained low compared with levels in early 2012. Signifi cantly, the capital expenditures index fell to 4.3, its lowest reading since 2009.

In a series of supplementary questions, manufacturers were asked about anticipated changes in their workforce and the factors underlying these changes. Twenty-seven percent of survey respondents indicated that they expected the total number of workers at their fi rm to increase over the next twelve months, while 19 percent predicted declines in their workforce—a considerably less positive balance than in last January’s survey. Among fi rms planning to boost employment, high expected sales growth was widely reported to be the most important impetus to hiring; conversely, low expected sales growth was most widely cited as the primary restraint on hiring. Sales growth was also seen as the primary factor behind employment increases and decreases in the 2012 survey.

- Sales +0.5 vs +0.2 Consensus
- Excluding Autos +0.3 vs +0.2 Consensus
- Market Reaction: Stocks and Bond yields moved anemically higher in a sort of obligatory nod to the headline, but have since fallen back to or below previous levels. The headline was more bullish than the internals and is being somewhat offset by other data, including a much weaker than expected NY Fed Index.

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for December, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $415.7 billion, an increase of 0.5 percent (±0.5%)* from the previous month and 4.7 percent (±0.7%) above December 2011. Total sales for the 12 months of 2012 were up 5.2 percent (±0.6%) from 2011. Total sales for the October through December 2012 period were up 4.2 percent (±0.5%) from the same period a year ago. The October to November 2012 percent change was revised from +0.3 percent (±0.5%)* to +0.4 percent (±0.2%).

Retail trade sales were up 0.4 percent (±0.5%)* from November 2012 and 4.4 percent (±0.8%) above last year. Nonstore retailers were up 12.6 percent (±2.3%) from December 2011 and miscellaneous store retailers were up 9.9 percent (±5.6%) from last year.