MBS MID-DAY: Reprices Reported

We have seen our first report of a reprice for the worse and more may be on the way with MBS FNCL 4.5's falling to new lows at 100-25; this after several bounces against support at 100-26. Treasuries, as benchmarked with the 10yr note have NOT yet broken their support at the weakest levels of the morning. That's 3.645 in the 10yr. But the current level of weakness in MBS is enough to see reprices from additional lenders and if 10's break support here, things could get worse, even ahead of the 2pm FOMC minutes.

Earlier, we mentioned a short term pivot point that could act as resistance if it was previously broken as support. On the initial weakness following 830am data, that pivot point was indeed broken as resistance, but bonds soon began rebounding after the 10yr rose to 3.645. That rebound was just blocked by the pivot point, effectively doing exactly what it's most likely to do: providing EITHER resistance or support depending on the side from which yields approach. The level itself is at 3.612. That sets up a goal to get through bullishly, while the AM highs at 3.645 set up a defensive perimeter we'd like to hold. A break of either is an indicator of short term momentum. FNCL 4.5's are at their lowest levels of the morning at 100-26. Reprices for the worse are possible from lenders who were out with rates before 8:45, but it's questionable as to whether or not they're "likely."

*** INDUSTRIAL OUTPUT -0.1 PCT (CONSENSUS +0.5 PCT) VS DEC +1.2 PCT (PREV +0.8 PCT) *** CAPACITY USE RATE 76.1 PCT (CONS 76.3 PCT) VS DEC 76.2 PCT (PREV 76.0 PCT) *** MANUFACTURING OUTPUT +0.3 PCT VS DEC +0.9 PCT, CAP USE 73.7 PCT VS DEC 73.5 PCT *** MINING OUTPUT -0.7 PCT (DEC +0.5 PCT), UTILITIES OUTPUT -1.6 PCT (DEC +4.1 PCT) *** INDUSTRIAL OUTPUT EX CARS/PARTS -0.2 VS DEC +1.2 PCT *** MOTOR VEHICLE ASSEMBLY RATE ROSE TO 7.81 MLN UNITS/YR FROM DEC 7.43 MLN *** INDUSTRIAL OUTPUT DECLINE FIRST FALL SINCE JUNE 2009 (-0.2 PCT)

The moderate weakness seen after morning data accelerated after 10yr notes failed to hold short term support and short sellers once again identified a good entry point had been seen earlier this morning. 10yr yields are now into the 3.63's, which is about mid-range in the trend channels that has contained yields since 2/8. The midpoint of this range has been supportive since 2/11 meaning we could look for support exactly at these levels, with a significant break suggesting something in the 3.66 range. FNCL 4.5's are down to 100-28 at the moment. A lender would have had to price very early (before 830 eastern) and fairly aggressively for us to be at risks of reprices for the worse.

The 10yr note had been around 3.59 this morning ahead of the Housing Starts and Producer Price Index (PPI) data, but have since moved just over 3.61. FNCL 4.5's are down to 100-31 after getting as high as 101-03 before the data. There is some pivot-based support near current levels in treasuries so a move into the 3.62's could mean we'd face challenges getting back into 3.61's and below.

The Producer Price Index for finished goods rose 0.8 percent in January, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This advance followed increases of 0.9 percent in December and 0.7 percent in November and marks the seventh straight rise in finished goods prices. At the earlier stages of processing, prices received by manufacturers of intermediate goods moved up 1.1 percent, and the crude goods index rose 3.3 percent. On an unadjusted basis, prices for finished goods advanced 3.6 percent for the 12 months ended January 2011. In January, leading the broad-based increase in the index for finished goods were higher prices for finished energy goods, which rose 1.8 percent. The indexes for both finished goods less foods and energy and for finished consumer foods also contributed to this increase, moving up 0.5 percent and 0.3 percent, respectively. The Producer Price Index for intermediate materials, supplies, and components rose 1.1 percent in January, the sixth straight monthly increase. Accounting for nearly two-thirds of the broad-based January advance, prices for intermediate goods other than foods and energy climbed 1.0 percent. The indexes for intermediate energy goods and for intermediate foods and feeds also contributed to this rise, moving up 1.8 percent and 0.4 percent, respectively. For the 12 months ended January 2011, prices for intermediate goods increased 6.0 percent, the smallest advance since rising 5.4 percent in September 2010 The Producer Price Index for crude materials for further processing increased 3.3 percent in January. For the 3-month period ended in January, crude material prices climbed 11.5 percent after moving up 8.8 percent from July to October. In January, about half of the broad-based monthly advance is attributable to a 4.3-percent rise in prices for crude foodstuffs and feedstuffs

JAN HOUSING STARTS +14.6 PCT VS DEC -5.1 PCT (PREV -4.3 PCT) ***596,000 UNIT RATE (CONSENSUS 540,000) VS DEC 520,000 (PREV 529,000) *** PERMITS -10.4 PCT VS DEC +15.3 PCT *** PERMITS 562,000 UNIT RATE (CONSENSUS 560,000) VS DEC 627,000 *** COMPLETIONS -9.5 PCT TO RECORD LOW 512,000 UNIT RATE VS DEC 566,000 *** HOUSING STARTS OF 5 UNITS OR MORE UP 80.0 PCT TO 171,000 UNIT RATE