MBS MID-DAY: 9/22/2011

(Reuters) - A gauge of future U.S. economic activity rose more than expected in August as the money supply increased due to support from the Federal Reserve, yet the reading suggest that the economy won't pick up any time soon, the Conference board said on Thursday.

The Leading Economic Index increased for the fourth straight month by 0.3 percent to 116.2 in August after a 0.6 percent rise in July. Economists polled by Reuters had expected the index to rise 0.1 percent.

"There is a growing risk that sustained weak confidence could put downward pressure on demand and business activity, causing the economy to potentially dip into recession," said Ken Goldstein, an economist at the firm.

He said the chance of a recession happening remains below 50-50, yet the odds have "certainly increased in recent months." (Reporting by Margaret Chadbourn; Editing by Theodore d'Afflisio)

Normally when we wake up to rallies of this magnitude, "something" happened in the overnight session to cause it. That's not the case this morning as the rally is essentially an extension of yesterday's post-FOMC rally.

We're taking the first steps into a brave new world in the land of MBS prices. All time highs have been crushed and the "concrete ceilings" that had capped all progress lie in smoldering ruin. If that all sounds a bit post-apocalyptic, it's for good reason. MBS prices and the Treasury yield curve being where they're at isn't necessarily a good thing, at least not outright.

There's a risk among the MBS devotees of the world to associate "green" and "good" without exception. The higher the better! But once again, bond prices are too high, too fast for MBS to escape without being forced to do so over an increasingly bumpy road.

Fannie 3.5's are half a point up at 103-17.
10yr yields are 8bps lower at 1.776.

Rate sheets should be improved, but expect variations between lenders to a greater extent than normal.

In the week ending September 17, the advance figure for seasonally adjusted initial claims was 423,000, a decrease of 9,000 from the previous week's revised figure of 432,000. The 4-week moving average was 421,000, an increase of 500 from the previous week's revised average of 420,500.

The advance seasonally adjusted insured unemployment rate was 3.0 percent for the week ending September 10, unchanged from the prior week's unrevised rate.

The advance number for seasonally adjusted insured unemployment during the week ending September 10 was 3,727,000, a decrease of 28,000 from the preceding week's revised level of 3,755,000. The 4-week moving average was 3,742,000, a decrease of 6,500 from the preceding week's revised average of 3,748,500.