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Market Commentary

Market Commentary

December 23, 2014
10-YEAR NOTES   100-19 (-06.5)
FN 3.5% COUPON   104-03.5 (-02.5)
SUPPORT   2.42%
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We have a lot of data to digest today ahead of the Holiday break with Durable Goods, GDP, FHFA Home Price Index, New Home Sales and Personal Income/Spending. Durable goods orders rebounded +0.3% in October following a -0.7% dip in September, and for November Durable Goods disappointed market expectations with a -0.7% decline (consensus +3.0%). November's decline in Durable Goods was led by transportation equipment, down -1.2%. Shipments of manufactured durable goods decreased -0.4%, Unfilled Orders increased +0.4% (highest since 1992), inventories increased +0.4%, and Non-defense New Orders for Capital Goods increased +0.5%. Excluding Transportation, Durable Goods slipped -0.4% vs. -0.9% prior (consensus +1.0%). Real GDP increased +5.0% in the Q3 (consensus +4.3%), the fastest growth pace in over a decade, up from the prior estimate of +3.9% and vs. +4.6% in Q2. The acceleration in real GDP reflected a downturn in Imports (-0.9%), and an upturn in Federal Government Spending (+9.9%) and PCE (+3.2%). The FHFA purchase only House Price Index was flat in September, following rise of 0.4% in August, and for October the index posted a +0.6% advance (consensus +0.3%). New Home sales came in lower-than-expected at 458K in October vs. 455K in September, and for November expectations are to edge up to 460K. Personal Income grew +0.2% in October after a +0.2% advance in September, and expectations for November are for a +0.4% increase. Personal spending gained +0.2% in October after a flat reading in September, and for November expectations are for a +0.5% boost.
Yesterday the coupon stack compressed, tightening roughly +1 tick in the production coupons, and MBS underperformed treasury hedges by 1/2-1 ticks. The curve continued to bull flattened with 2s10s down -3.4 bps to 150.3, pulling the 20-day average to 163.5 vs. 165 prior. 2s30s shrank to the lowest levels since January 2009, at 208.5 vs. 213 prior, in anticipation of the Fed raising interest rates despite falling global Inflation. The 30-Year current coupon declined -1.0 bps on the day to 2.83% and the 15-Year followed suit, down -1.0 bps to 2.08%. The G2/FN swap tightened 2-3 ticks in the belly along 3.0s through 4.5s with the G2/FN 3.5 swap at 0-19.25 vs. 0-21.5 prior. This morning treasuries fell in response to the hotter than expected GDP print, which reduced demand for government debt in anticipation of the Fed hiking rates next year. The curve has bear steepened with 2s10s up +1.7 bps to 146.8 and MBS recovered after yesterday's underperformance and is currently outperforming treasury hedges by 1-2 ticks.

This Week's Events:

12/23 Durable Goods Orders 05:30 November 3.0% -0.7% 0.4% 0.3%
12/23 GDP Annualized (QoQ) 05:30 3Q T 4.3% 5.0% 3.9% -
12/23 Personal Consumption 05:30 3Q T 2.5% 3.2% 2.2% -
12/23 Personal Income 07:00 November 0.4% 0.4% 0.2% 0.3%
12/23 Personal Spending 07:00 November 0.5% 0.6% 0.2% 0.3%
12/24 MBA Mortgage Applications 04:00 December 19 - - -3.3% -
12/24 Initial Jobless Claims 05:30 December 20 290K - 289K -
12/24 Continuing Claims 05:30 December 13 2375K - 2373K -
12/25 Market Closed - - - - - -
12/26 No Data - - - - - -



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