MBS RECAP: 8/29/2011

(Reuters) - Thousands of lobbyists are scrambling to influence the work of a congressional "super committee" given the job of identifying up to $1.5 trillion in deficit reductions. The committee is is due to report its findings by Thanksgiving and with such massive potential cuts to the U.S. federal budget being decided by just a handful of lawmakers in such a short timeframe, lobbyists say the mission to protect their clients' interests is unprecedented and potentially impossible. "Anyone who tells their client they have figured out how to influence this process is either lying -- or you should hire them," said Joel Johnson, a managing director at the Washington lobbying shop The Glover Park Group and a veteran of the Clinton White House and Capitol Hill. Johnson said when federal funds are being targeted in traditional congressional committees, work is more predictable with lobbyists knowing there are a handful of lawmakers who can be approached on any given issue that will determine the outcome. This special bipartisan committee, made up of six Republican and six Democratic lawmakers, was formed as part of the deal to raise the U.S. debt limit. It will meet independently from Congress, set its own rules and must come up with at least $1.2 trillion -- and potentially $1.5 trillion -- in budget savings for the next decade. If it fails, or if Congress does not endorse its plan, $1.2 trillion in mandatory cuts will be triggered in 2013. "It's absolutely on an unprecedented scale. This is deficit reduction. It will touch every industry, every spending category. This has not happened before. So everyone is in the position of determining the art of the possible in terms of influencing the outcome." Jack Howard, a lobbyist at Wexler & Walker with close ties to four of the committee's Republican members, said of the super committee and its mandate: "I've been in this town 32 years. It beats anything I've seen."

This has been one of the slowest volume days of the year. Gotta go back to late April to see slower. Things have traded technically as well with 10yr notes hitting the 3pm close inside the technical trend we've been tracking today and currently at 2.277. S&P's are making a push for their highest close since first plummeting toward 1200 from 1260 at the beginning of the month. There's hourly resistance at 1206+ and the highest recent daily close was 1204+. All that's splitting hairs though, considering volume. In general, things looks technically traded in stocks as well, with the low 1200's on the upside and 1120's on the downside. MBS are limping toward the finish line near their lows of the day, but to continue a common theme, the volume is so low that it just doesn't much matter. At this point, we're discussing prices and levels merely as a matter of protocol, and will have to wait at least until tomorrow before seeing where markets really want to be. But for sake of that protocol, Fannie 4.0's are down 12 ticks at 103-14 and 3.5's are down 11 ticks at 100-15. We'd normally wonder about reprices at the lows of the day, but that doesn't feel like a logical risk right now.

(Reuters) - Washington's never-ending budget battle threatened to snarl the recovery from Hurricane Irene as a top Republican said on Monday that any federal aid will have to be offset by spending cuts elsewhere. "Yes there's a federal role, yes we're going to find the money. We're just going to make sure that there are savings elsewhere," Representative Eric Cantor, the No. 2 Republican in the House of Representatives, told Fox News. Irene killed at least 21 people and caused substantial property damage from North Carolina to Vermont over the weekend. Cantor's Virginia district was among the areas hit by the storm as well as the epicenter of an earthquake last week. Obama administration officials said they had no estimate of the storm's cost as they were still assessing the damage, but other elected officials and companies have indicated that it will likely amount to billions of dollars. The administration will likely have to ask Congress for additional funding at a time when lawmakers are debating further budget cuts. The Federal Emergency Management Agency has suspended funding for some rebuilding programs from earlier disasters to ensure that its disaster-relief fund will not run out of money, according to agency administrator Craig Fugate. FEMA currently has $972 million in the fund, according to congressional Republicans. President Barack Obama has signed declarations committing the federal government to help states from North Carolina to New Hampshire cover disaster-response costs.

After hitting nearly 2.29, 10yr yields are back down to 2.266 and MBS are back near their higher levels of the past 5 hours. For 4.0's that's 103-19 and 100-21 for 3.5's. This comes on the heals of the S&P's failure to break through levels from 8/17 around 1206. Remaining lower than that keeps the index range bound for most of the month and bond markets seem to be watching, themselves rangebound over the same time period. The moderation of earlier weakness greatly decreases the risks of reprices for the worse and makes the charts currently look more in line with reprices for the better. But the story in stocks has yet to play out. With 2 hours left, an index value of 1204.54 is well within striking distance of the breakout. Even so, volume is so appallingly low around the board that whatever happens today is likely of little consequence to the next 3 days, whic in turn are of little consequence versus Friday's NFP.

(Reuters) - Hiring by small businesses slowed in August and employers reduced hours, an independent survey showed on Sunday, suggesting the recent stock market turmoil may have dampened job creation. Intuit, a payrolls processing company, said small businesses added 35,000 jobs after increasing employment by 40,000 in July. The survey is based on responses from about 66,000 employers at businesses with fewer than 20 employees that use the Intuit Online Payroll system and covered the period from July 24 to August 23. "There was plenty of bad news this month and the Intuit small business employment figures show this," said Susan Woodward, the economist who helped to develop the survey. "From this month's numbers, we don't see a new recession, but we don't see a robust recovery either." According to a Reuters survey, nonfarm payrolls probably increased 80,000 this month after July's 117,000 gain. Three of the 62 economists polled predicted a contraction in nonfarm employment this month, citing the erosion of business confidence and a strike by 45,000 Verizon Communications workers during the payrolls survey period. They cautioned, however, that a drop in August employment should not be interpreted as a sign the economy was back in recession. The economy grew at a 1 percent annual rate in the second quarter after expanding only 0.4 percent in the January to March period. (Reporting by Lucia Mutikani; Editing by Dan Grebler)

S&P's are at their best levels of the day at 1203.51 and while 10yr yields aren't at their absolute highest yields of the day, they're at their highest point relative to a supportive line that has kept them contained since 8/11, currently at 2.28. Fannie 3.5's are about mid range at 100-18 while Fannie 4.0's are near their lower end at 103-15. Which one to trust as far as being indicative of reprice considerations today? Well, we do know that 3.5's still aren't being meaningfully originated in the secondary market, but that's not to say that loans eligible for that coupon (3.75-4.125%) aren't getting written. 3.5's matter to whatever extent you're seeing 4.125% or less on rate sheets as being viable options. Whatever the case, 4.0's certainly matter enough to be concerned that they're near their lows. It's not unheard of to see lenders get a bit more defensive than they otherwise might be simply due to a weak 10yr benchmark (not common though!). Still, we're starting to get slightly anxious about reprices for the worse and will label this an alert because of that, but we won't start anticipating that reprices are flat-out LIKELY until we see a definitive break below 103-15 in 4.0's, 100-16 in 3.5's or a break above 2.28 in 10yr yields (a move that would likely foreshadow the aformentioned moves in MBS). So if you're on the edge of a lock decision, market movements say you're OK for now, but lender behavior might vary in rare cases, and then becoming less rare if those lock targets are broken.