MBS Pricing Snapshot

MBS are on the edge of justifying positive reprices as bond markets continue to push back against the initial weaker response to this morning's stronger data. 10's just hit their low yields of the morning and Fannie 4.0s are only 1 tick from positive territory. Even holding here will be good enough for a few of the early priced lenders to consider a reprice. The longer that continues or is improved upon, the wider the doors open for other lenders to get on board.

Improvements are currently contending with resistance at overnight lows in Treasuries. In other words, while yields are at their lowest levels of the domestic session, they're only *in line* with the lowest levels from European hours. Looks like we're breaking those now...

Last caveat: keep an eye on rate sheet print times. Some lenders will have based sheets off prices that had already rallied. They'd be slower to reprice, naturally, if at all.

This is one of those less-than-common situations where the proverbial bull just ran through the china shop without the typical effect. Plates may be teetering on their stands and a few may have been broken, but most of the inventory remains intact.

In other words, we had bullish data invade a space that is predisposed to being damaged by bullish data recently. But the damage has been minimal so far. Even if we can't be sure we've seen the worst of it yet, we're getting a good bounce so far on our second approach to the weakest levels of the morning.

10yr yields, for instance, came into the domestic session just under 3bps higher after a relatively uneventful overnight session. They moved up to 2.83 immediately following the GDP and Jobless Claims data, but are now back down to 2.81.

MBS similarly opened up slightly weaker than yesterday's latest levels with Fannie 4.0s at 103-00 ahead of the day and falling to 102-24 after the data. They're now back up to 102-28.

The move back in the other direction hasn't been swift, but the defense of the weaker levels (determination of Treasury yields to hold under the ceiling at the highs or of MBS Prices to hold above a floor at the lows) has been reasonably strong. It's not safe to assume we won't revisit the weakest levels, but at least we're in a position to consider that it might not happen (as opposed to simply watching prices fall lower and lower).

There are no other significant economic reports this morning though the last of the week's Treasury auctions will hit at 1pm. Bond markets may be slightly hesitant ahead of the auction, but may express some "relief bid" afterward (this refers to the 3-day cycle of Treasury auctions where investors know they'll be bidding on a set amount of Treasuries but not exactly how that bidding will go. This can keep purse strings just slightly tighter until the auction cycle is successfully completed, and slightly looser afterward).

- Claims 331k vs 332k forecast, 337k previously
- Continued Claims 2.989 mln vs 2.980 mln forecast

- Market Reaction: this is one of the most "as-expected" Jobless Claims reports in recent memory, with only a 1k deviation from consensus and a 1k revision to the previous month. GDP data is therefore credited with having a bigger impact at 8:30am.

In the week ending August 24, the advance figure for seasonally adjusted initial claims was 331,000, a decrease of 6,000 from the previous week's revised figure of 337,000. The 4-week moving average was 331,250, an increase of 750 from the previous week's unrevised average of 330,500.

The advance seasonally adjusted insured unemployment rate was 2.3 percent for the week ending August 17, unchanged from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending August 17 was 2,989,000, a decrease of 14,000 from the preceding week's revised level of 3,003,000. The 4-week moving average was 2,996,250, an increase of 9,500 from the preceding week's revised average of 2,986,750.

- GDP +2.5 vs +2.2 forecast, +1.7 previously
- Deflator and PCE Prices (inflation metrics) unchanged
- Exports +8.6, most since Q2 2010

- Market Reaction: While stronger than expected, this was within the range of estimates, even if on the higher end. Bond markets have weakened, but are already showing signs of support after only moderate losses.

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.5 percent in the second quarter of 2013 (that is, from the first quarter to the second quarter), according to the "second" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 1.1 percent.

The GDP estimate released today is based on more complete source data than were available for the "advance" estimate issued last month. In the advance estimate, the increase in real GDP was 1.7 percent. With this second estimate for the second quarter, the increase in exports was larger than previously estimated, and the increase in imports was smaller than previously estimated

The increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, private inventory investment, nonresidential fixed investment, and residential fixed investment that were partly offset by a negative contribution from federal government spending. Imports, which are a subtraction in the calculation of GDP, increased.

The acceleration in real GDP in the second quarter primarily reflected upturns in exports and in nonresidential fixed investment and a smaller decrease in federal government spending that were partly offset by an acceleration in imports and decelerations in private inventory investment and in PCE.

Both GDP and Jobless Claims were stronger than expected. 10yr yields are up to 2.83 and Fannie 4.0s are down 13 ticks at 102-23. More to follow...