Those of us who remained on the float boat overnight are certainly enjoying the waters this morning.  Momentum from yesterday combined with today's economic data is helping MBS to improve even farther.

The 5.5% coupon is currently at 100-28, which is 13/32nds better than yesterday.  We shot up early this morning after favorable data.  Speaking of the data, here it is:

  1. Personal Income and Outlays report -- Personal income change met expectations of a 0.3% gain.  Outlays were .1% higher than the expectation of .3% coming in at .4%.  There are numbers behind the numbers though.  Once Food and Energy prices are factored out and market weighting is factored in, the core PCE deflator rose by .2% was it has done every month since October, adjusted for market-weight, the number falls to 1.8%.  Although on the higher side of the Fed's comfort zone as far as inflation, this is good new for the bond market as it does indeed signal that inflation is in check.  MBS rallied sharply after the report.
  2. Jobless Claims - This report read at 380,000, fairly higher than expectations of 360,000.  Seeing as how the forecast of 360,000 was already going to be a 18k increase over last month, the fact that it was in fact a 38k increase month over month has fixed income buyers optimistic for a bad jobs report tomorrow.  Bonds gained momentum after this news as well.
  3. Challenger Job Cut Report - The other weak employment data we just discussed is being bolstered by the worst Challenger Job Cut Report this year at 90015 announced layoffs.  The highest we've been so far this year was around 73k in February.  This is not a closely watched report, but it is frosting on the cake for bad employment numbers.
  4. ISM - The institute for Supply Management tracks business conditions in the manufacturing sector.  Above a reading of 50 signals growth and below, contraction.  This month's number read at 48.6, a touch higher than expectations of 48.0
  5. Construction Spending was nearly in line with expectations of -0.9% with the actual number being 1.1% loss.  However, February's reading was revised higher.

The last two pieces of data (ISM and Const. Spending) are giving the bond market a bit of indigestion as they were in the middle of enjoying a meal of weak economic data.  MBS pricing peeled off 4/32nds immediately following the news released just now at 7AM pacific.

If your lender already released rates this morning, and you want to make a very conservative lock decision, now would be the time.  We've knocking on the door of 101-00 in the 5% coupon.  That means there is more resistance to move higher and more sellers engaging in "profit-taking" on the MBS market.   Stocks would have to demonstrate a lackluster reaction for MBS to move any higher on the day.  But the market-mover is yet to come tomorrow.  If the Non-Farm Payrolls (NFP) from tomorrow confirm the severity of the labor market problems, there will be nowhere for MBS to go but up (rates down).  So again, the adult in me (who loves the whole grain wheat) thinks that locking now is a fairly rewarding time to take the risk out of the market, but the kid in me (who loves the frosting) thinks that tomorrow we will in fact get negative jobs numbers and rates will improve further. 

So will it be "forever young," or "the older I get the wiser I get?"  You'll have to go with your gut.  Also, much will depend on how the rest of the day shakes out.  Once again, treasuries are tracking nicely with MBS today, so you can use that as a gauge of reprice risk.  If your lender released rates already, you may be seeing a reprice for the worse, but it's not likely unless the 5.5% coupon goes a bit lower than it is now.

So if I'm forced to take a stand, then I'm staying in this boat till the very end (Friday's economic data), for reasons outlined in yesterday's last post.  So far, those instincts have served us well.  But as always, I call on you to understand the implications of the impending data and draw your own conclusions based on your visceral and educated feelings bout the market.  Stay tuned!