UMBS opened down 8 bps in the first hour of trading.  S&P Futures flat.

Bonds were slightly stronger in the overnight session with the best levels seen right at midnight.  Yields rose ahead of the AM data, but remained in positive territory.  After the data, bonds are back into negative territory with MBS down 2 ticks (.06) and 10yr yields up 0.1bps at 4.341.

If we had to blame one report for the reaction, it would surprisingly be Import Prices.  Why surprising?  This report almost never has a discernible impact, but in today’s case, the 0.9 vs 0.3 gap is uncommonly huge.

Jobless Claims : 222k vs 220k f’cast,              [232k prev]

Philly Fed Index : 4.5 vs 8.0 f’cast,              [15.5 prev]

Import Prices : 0.9 vs 0.3 f’cast,             [0.6 prev]

The improvement in inflation didn’t change Minneapolis Fed President Neel Kashkari’s view on the economy. The biggest uncertainty in my mind is how much downward pressure is monetary policy putting on the economy? That’s an unknown,” Kashkari told the Williston Basin Petroleum Conference

Housing starts disappointed yet again, coming in at 1.36 million versus the 1.44 million expectation. This number was up 5.7% on a monthly basis and flattish on a year-over-year basis. Building permits fell 3% MOM and 2% YOY to 1.44 million units.

Builder sentiment fell in April on the back of higher mortgage rates. “The market has slowed down since mortgage rates increased and this has pushed many potential buyers back to the sidelines,” said NAHB Chairman Carl Harris.  Even though yesterday WE saw that New Home purchase applications rose 22.1% in April compared to a year ago, according to the MBA. On a month-over-month basis they rose 2%.

Today brought the last of the scheduled economic data until the end of next week.  Even then, the data won’t be too relevant for at least 2 weeks when the next PCE price index comes out.  Ironically, we’ve always considered Import Price data to be in the “not too relevant” category, but it appears to have challenged that notion today, thanks in large part to the massive gap versus expectations (0.9 vs 0.3). With that, a number usually disregarded as noise was suddenly worth a small bump in forecast for PCE.  Initial weakness was modest and it leveled off quickly, but the rest of the day saw a slow, directional leak that left MBS down a quarter point.

UMBS closed down 25 bps at 100.55