Rate Snapshot: Retail sales better than forecasted causing MBS price decrease

by MPA14 Nov 2014

By David Shirmeyer, CEO at Sigma Research

October retail sales was better than forecasts; +0.3% against +0.2%, ex auto sales also better at +0.3% against 0.2% expected. Retail sales ex autos and gasoline +0.5%. Overall a better and recovered from -0.3% in Sept. October a much better month than Sept; lower gasoline prices are adding money in the pockets of consumers and the price of gas is continuing to fall in November, raising the odds that spending will continue to improve through year-end. Falling unemployment also means more Americans have extra cash, brightening the outlook for holiday sales even as bigger wage gains have been slow to materialize. On line retail sales increased 1.9%, the biggest increase since last March. Auto sales up 0.5% in October. It was a very good report for consumers and the economic outlook.


There was little reaction to the strong sales data in the stock index trading. The 10 year note yield ended yesterday at 2.34%, after the sales data this morning the 10 yield at 2.36% at 9:30. MBS price at 9:30 -9 bps from yesterday’s close and +8 bps from 9:30 yesterday. At 9:30 the DJIA opened -11, NASDAQ -4, S&P unch; 10 year at 9:30 2.37% +2 bps while MBS price at 9:30 -9 bps from yesterday’s close and +8 bps from 9:30 yesterday.


Better news out of Europe this morning; the EU reporting GDP increased 0.2% from 0.1% in the previous quarter, consensus was an increase of 0.1%. EU saying Greece is exiting recession and Germany and France showed better growth than thought. After all of the negative news from the region the report this morning is a plus for US economic growth, but Europe is still teetering on deflation. Sometimes even a minor improvement can be seen as good, in this case better doesn’t equate to good. Bottom line; the data looks good but the reality is Europe is barely hanging on, declining investment and high unemployment.


At 9:55 the U. of Michigan consumer sentiment index was expected at 87.5 from 86.9, as reported the index ran up to 89.4. Another indication consumers may be coming out of their shells and will begin to spend more; mix it in with the better retail sales in October and this morning we have good economic news that will keep interest rates from declining for the moment. The reaction has dropped MBS prices 5 bps from 9:30 pricing levels listed below.


At 10:00 September business inventories was thought to be up 0.3%, as reported up 0.3%. August inventories revised from +0.2% to +0.1%. The report is a wash in terms of any direct change on estimates for Q3 GDP.


The 10-year note yield jumped to 2.38% this morning on the initial reaction to the better retail sales data but then backed off a little. MBS knee jerk reaction pushed the price down 23 bps but also has rebounded. The 10 remains slightly bearish from a technical perspective, investors and traders not heavy sellers but equally not willing to buy at the present levels and the near term outlook for increased consumer spending as price of crude is driving gasoline down. The 10-year for almost three weeks in a narrow range, keeping MBS rates in their narrow ranges.


PRICES @ 10:10 AM

10 year note:                 unch 2.34% unch (high this morning 2.38%)

5 year note:                   -2/32 (6 bp) 1.64% +1 bp

2 Year note:                   -1/32 (3 bp) 0.54% +1 bp

30 year bond:                 +9/32 (28 bp) 3.06% -1 bp

Libor Rates:               1 mo 0.152%; 3 mo 0.233%; 6 mo 0.326%; 1 year 0.563%

30 year FNMA 3.5 Dec:  @9:30 103.19 -9 bp (+8 bp from 9:30 yesterday)

15 year FNMA 3.0:         @9:30 103.86 -13 bp (-8 bp from 9:30 yesterday)

30 year GNMA 3.5:        @9:30 104.28 -9 bp (+1 bp from 9:30 yesterday)

Dollar/Yen:                116.63 +0.86 yen

Dollar/Euro:              $1.2419 -$0.0058

Gold:                         $1148.60 -$12.90

Crude Oil:                 $74.79 +$0.58

DJIA:                        17,659.74 +6.95

NASDAQ:                  4681.39 +1.25

S&P 500:                  2041.59 +2.26