MBS MID-DAY: Sideways Again

(Reuters) - U.S. bank earnings continue to increase but the trend is mostly due to institutions setting aside less to guard against losses, a top regulator said on Tuesday. The Federal Deposit Insurance Corp said that the industry earned $28.8 billion in the second quarter, a $7.9 billion increase from a year before. The agency once again warned these earnings increases can not be sustained simply by reducing the amount set aside for losses. "As the levels of loss provisions approach their historic norms, the prospects of earnings improvement from further reductions in provisions diminish," FDIC Acting Chairman Martin Gruenberg said in remarks prepared for delivery. Bank revenues continue to fall. During the second quarter net operating revenues fell $3 billion, or 1.8 percent, from the levels recorded a year ago, the agency said. In a positive sign for the industry, bank loan balances grew during the second quarter for the first time in three years, up $64.4 billion, or 0.9 percent. The number of banks on the agency's "problem list" fell for the first time in 15 quarters, dropping to 865 in the second quarter from 888 in the first quarter. (Reporting by Dave Clarke, Editing by Dave Zimmerman)

(Reuters) - A gauge of factory output on the U.S. eastern seaboard fell further into negative territory in August on slower growth in new orders and shipments, the Federal Reserve Bank of Richmond said on Tuesday. The Richmond Fed said its composite index of factory activity in its district fell to -10 USRFDM=ECI from -1 in July. The Philadelphia Fed's factory survey released last week showed output plunged in the Mid-Atlantic region during the same period. The Philly Fed reading dampened hopes for a quick revival in U.S. economic growth. Any reading below zero in the Richmond Fed index indicates contraction in the region's manufacturing. The survey covers factories in the District of Columbia, Maryland, North Carolina, South Carolina, Virginia and most of West Virginia. The Richmond index is a measure of factory shipments, new orders and employment in the region. (Reporting by Jason Lange; Editing by James Dalgleish)

Things are significantly more volatile this morning as opposed to yesterdays exceedingly sideways range-trading. Implied volatility based on levels in the options market is through the roof indicating that markets are accounting for the possibility of wide swings in the short term. Speaking of wide swings, after opening in the red, stocks shot up about 15 points in 20 minutes and carried that rally through the 10am release of New Home Sales. Just before that, Bond markets rallied on the indecisive domestic stock market open. That brought MBS to unchanged on the day and 10yr yields into the 2.11's. When stocks staged their quick paced rally, bond markets faltered and looked like they might head back to the morning's previous weaker levels, but in the past few minutes, stocks hit another ceiling before reaching yesterday's highs and bond markets are once again pressing forward. 10yr notes and MBS just ticked into positive territory with the former at 2.1075. Fannie 4.0's are 2 ticks better on the day at 104-01 and 3.5's are 6 ticks better at 101-08. Only the jumpiest, itchiest-trigger-fingered lenders might reprice for the better here. Things are too volatile otherwise, and some lenders aren't even out with their first sheets yet. Those who aren't out yet may be further delayed on this morning's surge in volatility. However, if current levels in MBS are able to hold, lenders who WERE ALREADY out with weaker pricing this morning are increasingly likely to reprice for the better as time goes by, but that assumes that the morning's weaker rate sheet offerings were not a factor of pipeline control. Simple world we live in these days, right? Let us know if you have questions or need clarification on any of this. There's a lot going on.

Sales of new single-family homes hit a 5-month Low in July, falling to an annual rate of 298k from June's 300k. Economists polled by Reuters had been expecting 310k. In percentage terms, this is a 0.7 pct decline and follows a decline of 2.9 pct in June. Sales actually increased in the Northeast and Midwest, but were offset by the declines in the South and West regions. The NE region moved up 100% from 14k units to 28k units, while the other three regions moved less than 10%. The median price of New Homes sold in July stood at $222,000 which is up 4.7 pct from a year ago. The total number of homes for sale across all regions fell to another record low: 165k in the current report vs 166k in July.

Today is kicking off in similar fashion to yesterday with stocks stronger/bonds weaker from the European and Asian sessions. 10yr yields backed up to the mid-point of the "counterattack" trend channel (linked below). With a lack of "risk-off" inspiring headlines, auctions to get through, and uncertainty over the Jackson Hole outcome, this gradual trend of higher yields in 10's may not end here. But so far this morning, 10yr yields have moderated somewhat, now under 2.15 after getting into the 2.16's early this morning. Their next major move likely depends on the domestic stock market open at 9:30. MBS are weathering the storm slightly better. Fannie 4.0's are down 3 ticks at 103-29 and 3.5's are down 2 ticks at 101-01. There's currently a pivot between yesterday's prices and today that we'll watch for any ongoing resistance to further gains. Rate sheets might not be too delayed this AM, but may be slightly weaker if current prices prevail. The only economic data of the morning hits in just over half an hour with New Home Sales at 10am. Then there's the 2yr Treasury Note Auction at 1pm.

(Bloomberg) - St. Louis Federal Reserve Bank President James Bullard, who was the first Fed policy maker to urge the round of bond purchases that started last year, said the central bank isn’t signaling a third stimulus program with its commitment to keep rates near zero through mid-2013. “The most likely outcome for the U.S. economy is still that the economy continues to grow at a moderate pace through the second half of the year,” Bullard said late yesterday in a telephone interview. “If the economy is substantially weaker than expected, we could take more action, especially if it was coupled with a renewed deflation risk.” Bullard, who doesn’t vote on monetary policy this year, said he would have dissented against the Aug. 9 Federal Open Market Committee statement that for the first time attaches a date to its pledge to keep borrowing costs in a range of zero to 0.25 percent. Previously, the FOMC promised to keep interest rates low for an “extended period.” The change increased speculation among some economists that the Fed will begin a third round of asset purchases, with Goldman Sachs Group Inc. Chief Economist Jan Hatzius predicting a “greater-than-even chance” of more bond buying. The Fed in June concluded a $600 billion bond-purchase plan, and has maintained its balance sheet near record levels by reinvesting proceeds from its securities holdings. A new round of bond purchases “does not follow naturally” from the 2013 pledge, “because I think we have to get more information about how the economy is going to develop in the second half of the year,” Bullard said. Goldman Sachs’s forecast stems from the firm’s economists having a “more pessimistic outlook than most” economists, he said.