In A Word:

Consumer Confidence fell to a record  low this morning, prompting this year's new intraday low for stocks.  However it won't be "off to the races" for MBS and other bonds to the same extent we might see if we didn't have a Fed day tomorrow.  The 6.0% coupon got a jolt up to 100-12 immediately following the news, but has since moderated back to 100-10.

The Why:

Everything seems to follow reasonable rules of cause and effect this morning.  In recent weeks, MBS prices have become reasonably hedged for future rate cuts from the Fed, yet not hopelessly so.  Still, the appalling Confidence numbers tip the scales of concern slightly towards economic weakness, shifting attention away from inflation, even if only momentarily.  As we routinely discuss, a weak economy tends to create buying demand for the relative safety of fixed income investments.  So we have good demand for treasuries today, and slightly less, but still reasonable demand for MBS.

The Numbers:


6.0% FNMA is up 8/32nds to 100-10

6.5% FNMA is up 5/32nds to 102-13 

The News:

  •     Consumer Confidence Fell to 50.0, a record low and well off expectations of 56.0
    • It seems those "good 'ol" Dubya Special Deliveries are not quite having the impact he would have hoped.  This is not a surprise to us though as we discussed that, just as Wall Street firms are more interested in shoring up their balance sheets in these trying economic times, so too are consumers more likely to shore up their balance sheets with their extra $600.00 than they are likely to use it to "go buy stuff."  Sorry Dubya...
    • But not only are they not buying stuff, but they don't think they'll want to any time soon.
  • Richmond Fed Survey
    • Not quite as salient as Philly or Empire State reports, the Richmond report is still an indicator of the overarching ISM numbers. 
    • This is the second month in a row it has been negative and is down minus twelve versus, quite a jump from last month's minus three, and yet more evidence for the weakening economy
    • Both this weakness and that indicated by the Confidence numbers are generally positive indicators for bonds.  The only complicating factor is that this weakness arises during, and in part, can even be arising as a result of inflation.  Inflation being the sworn mortal enemy of the bond market, this is a bit of a predicament for bond traders
  • Your good friend and mine, Robert Shiller, out again with the latest Case-Shiller price index numbers.  Result: not so good...
    • The main portion of the data is that prices are down year over year 19.1% in the 10 city index.  The index continues to push into it's lowest territory since it began.  Each month in recent months has been a new low.


So it's more economic weakness from the scheduled data.  For those who argue that the consumer's willingness and ability to spend drive 70% of the economy, this is more indication for a deepening recession and consequently improving prices in fixed income including MBS.  However, Inflation is the Devil you know, and sadly, it's a weed (Devil's Snare anyone?) that has entangled the roots of this garden economic weakness, sabotaging what might otherwise be glorious foliage on our flowers of MBS gains. 

Bernanke's goal is to prune the garden back (stimulate economy) without providing a conducive environment for the weed (can't cut too much or inflation gets out of control).  So there must be a balance of policy decisions between addressing both inflation and the ailing economy.  Or would you prefer another analogy?  I know Paul Chandler would...  How about a "scales" analogy?  Oh but don't think of these scales so much as the simple little metal ones from 9th grade science class.  These scales are more like a very large, very angry, and quasi-invincible dragon. 

Each side of these "scales" represent each side of this archetypal dichotomy.  Perhaps on one side are the scales of the Dragon's formidable tale, spiked and vicious, able to cleave the very flesh from your fixed income returns with one single inflationary swing.  The other side then, of course, would be the scales near the Dragon's mouth from whence issues a fiery napalm, engulfing its victims, American Consumers, causing them to "feel the burn" and thus be rendered incapable of contributing to economic growth.  (Yes, I think this will have to be our extended metaphor for inflation versus growth).

Lock or Float:

MBS are paring their gains from the highs as stocks rally.  Some lenders that priced more aggressively after the Consumer Confidence index may have to soon reprice for the worse.  The more important concern for you is whether or not you want to join in the battle tomorrow (FOMC announcement), knowing that roaming the battlefield will be the mythical dragon, who may grant you the boon of burning your enemies with his flames (in other words, Bernanke focuses more on the down economy, thus giving a boost to MBS), or who might just as easily knock you into the next zip code with a swing of his mighty tail (Bernanke focuses more on inflation and/or stabilizing growth, thus causing heavy selling in MBS).

Either way, many of you may well feel safer being locked in the tall tower, "locked" being the operative word.  One benefit of the almost certain price volatility of Fed Day, is that we can usually see movement coming.  Lenders know this and tend to hedge conservatively on Fed Day's, but at least if you want to try to make it though the day, the huge potential impact of the FOMC announcement will not be present in the morning's rates, thus giving you another chance to scarper. 

Watch out now, as I type, and as the Dow rallies, MBS are selling.  We're down to 100-07 on the 6.0% coupon, and nearing reprice risk territory.  Still, if you think the weakness can persist through today without the Dow turning positive, tomorrow could be a great day for rates, and even if it's not, we should be able to outrun the dragon as we flee for that locked tower.