The relevant data this morning:

  1. GDP = 0.6%, dead even with analysts' expectations.  Although this is a very poor growth rate, the fact that it is in line with analysts' predictions means the weakness of the reading had already been "priced in" to trading so this does nothing to help MBS pricing this morning.  Adjusted for inflation, the numbers are their weakest since 2001.
  2. Corporate Profits fell 3.3% which yields a 6.6% change year over year.  This is not of great importance to the MBS market.
  3. Jobless Claims, expected at 370,000 came in just slightly better at 366,000.  Even so, this worsened the 4-week moving average to its highest point in 2 years.  The fact that this report failed to deliver crushingly negative news for the economy is also doing nothing to help the MBS market
  4. PCE component of the GDP (Personal Consumption Expenditures, a gauge of inflation) came in .2% lower than estimates at 2.5%.  Although lower than estimates, the actual number is still higher than the inflation-wary would prefer.  So despite the better than expected inflation data, MBS are not reacting positively to this news either.
  5.  Dow Futures were up on all of the above data, which, in and of itself is a piece of data that harms MBS

So this is not a fantastic morning for MBS with the 5.5% coupon down about 9/32nds.  Furthermore, it's a bit troubling, but not completely unexpected considering our Jean-Claude Van Damme analogy from yesterday, that the data, in and of itself, is quite poor, yet the market bulls actually like it!  Just goes to show you that if you've been eating "you know what" for a while, even Denny's will start to taste like a palatable breakfast.

But just now, after the open, the Dow has not come out of the gate like a lion, but is more resembling a half-sheep, half-bull (up about 20 points).  None of this data is really crushing news for MBS, so the lemmings' sentiment regarding stocks has helped to keep us down a bit this morning.  They may realize (we hope) that their jaunt up that hill that they hope leads them to lemming-paradise is not quite as nice as the brochure.  To cut through the excessive pun and metaphor, I think there was a little too much exuberance in the reaction to data that was simply "less than crappy."  As the morning progresses, I hope traders take a step back and realize that the data, despite hitting expectations, is still crappy.  This will hopefully prolong the indecision of stocks and open the door for MBS buyers to come back into the market.

The price curve on MBS set an obvious floor (even if it's temporary) at 100-12 on the 5.5% coupon at 8:50 and has been moving steadily upwards since (now at 100-17).  So despite the fact that rates may be .25 worse this morning over yesterday, it's another floater until (or rather "unless") that price hits the floor at 100-12 again.  As stocks retreat back to lemming safety, we may get some nice improvements in MBS very quickly.  Even as I typed the last paragraph, the Dow sunk to near even and bonds advanced another tick.

 Stay tuned!