The Week Ahead: MBS Reinvestment Program Begins

With the worst quarter for stocks since 2008 now behind, global investors are hoping and praying for the return of stability and growth. But fears of a double-dip recession coupled with a packed economic calendar are not likely to contribute to that outcome.  Beyond domestic economic data, the debt crisis in Europe continues to occupy a large part of the market's attention.

The passing of quarter-end paper-shuffling and the onset of Operation Twist (Here are the details: Schedule  FAQ) as well as the Fed's new MBS buying efforts, should be calming and buoyant factors for bond markets this week, not to mention the charactertic narrowing trading ranges that often precede Non-Farm-Payrolls.

The benchmark 10-year Treasury is starting the week five basis points lower at 1.87%, while the 30-year yields is seven basis points down at 2.84% and the two-year yield is steady at 0.25%.

S&P 500 futures are down 3.1 points at 1,122.90, while Dow futures are 37 points lower at 10,804. 

Fannie Mae 30yr Fixed MBS 3.5 Coupons are 11/32nds higher than Friday's last mark at 103-04.

MBS have had a rough go of it versus Treasuries of late, and although there spread between the two has seen a bit of expected volatility in several trading sessions following the announcement itself, the MBS component of Operation Twist is widely expected to be a long term net-benefit to MBS spreads vs Treasuries.

Key Events This Week:

Monday:

10:00 - The ISM Manufacturing Index continues to teeter on the brink of contraction. Economists expect the index to come in below 51 for the third consecutive month in September - less than a point away from indicating a slowdown in national manufacturing. 

Regional indexes have been weak overall, but the Chicago Business Barometer surprised to the upside last week, providing some hope that pockets of growth remain.

"Manufacturing had been a driving force behind the recovery, especially toward the end of 2010 and early this year," said Citigroup. "But the pullback in domestic demand this year has dampened activity in factories. We think that the extreme weakness in some other business surveys, such as the Philly Fed index, has exaggerated the pullback in manufacturing. The Philly headline index incorporates respondents' subjective views of the economic environment. In contrast, the ISM index is an average of component indexes that are based on current activity."

As recently as April, the index showed a higher-than-60 level, indicating strong and broad growth. But the New Orders component, a forward-looking indicating, has come in just below the 50-threshold for the past two months.

10:00 - Expect a 0.2% drop in Construction Spending for August, economists say. The report last fell 1.3%, as public construction fell 2.1% - the 9th fall in 10 months - and private construction dropped 0.9%. 

This month should see "modest increases" among non-residential and multi-family projects, partly offset by another slip in public construction, according to IHS Global Insight. 

Citigroup, however, expects gains in private spending to give the headline a 0.2% uptick.

"Residential investment has been treading water in the past year, reflecting stagnant housing starts. But nonresidential construction has been on a rising tack," Citi said, noting the sector should provide a small gain to Q3 GDP. "The gains in nonresidential investment have been partially offset by ongoing losses in state and local government projects."

6:00 - Jeffrey Lacker, president of the Richmond Fed, speaks at the University of Wisconsin on "Economics After the Crisis." Q&A to follow.

• Treasury Auctions:
• 11:30 - 3-Month Bills
• 11:30 - 6-Month Bills

Tuesday:

10:00 - Fed chairman Ben Bernanke gives a talk before a bipartisan congressional panel on the U.S. economy.

10:00 - Factory Orders should show a minor slowdown in August of 0.1% following a  transportation-led 2.4% jump the month before. The already-reported 0.1% fall in new orders for durable goods provides most of the ket data for this report, yet forecasts range from a 1% decline to a 1.1% jump, so there's room for a surprise.

"Orders held up surprisingly well in the advanced notification of durable goods orders in August, which sets the tone for factory orders," said Nomura Global Economics. "Price weakness from falling commodities over the month, however, should limit the upside for nondurable inventories and orders. We forecast an increase of 0.1% in August factory orders, with inventories increasing by 0.5%."

• Treasury Auctions:
• 11:30 - 4-Week Bills

Wednesday:

8:15 - Private employment growth has been weak in recent months, and September is anticipated to be worse. The ADP Employment Report is expected to show just 70k new jobs last month, versus 91k in August and 109k in July. Forecasts range from a 10k drop to a 117k surge. Problematic as this report can be, it should guide expectations for Friday's "official" report.

10:00 - Like its manufacturing cousin, the ISM Non-Manufacturing Index is expected to slow down from its August levels, but unlike its cousin this index has room to fall before entering contraction. Economists look for a score of 53, with forecasts sitting in a range from 51.3 to 55. The index measures the services, construction, and financial industries.

"The services side of economic output has found itself in the enviable position of being the stronger, after spending the bulk of the recession lagging the manufacturing sector," said Janney Capital Markets, noting how an unexpected increase in August pointed to a certain resiliency among services-sector corporations. 

"On the positive side, client demand for business services seems to be trending stably, and the recent GDP data point towards a consumer base more willing to spend on services than goods," Janney added. "On the negative side, business confidence is easing, introducing a possibility of cut not, ask questions later actions from services sector firms. We see the services industry as likely to prove durable through the ongoing economic slow patch, though possible at the expense of jobs."

Thursday:

8:30 - Technical reasons rather than economic ones led the weekly Initial Jobless Claims figure to fall 37k to to just 391k in the week ending Sept 24. So it's not surprising that economists anticipate this week's number to climb back to something closer to the four-week average of 417k. The median estimate is 411k; forecasts range from 385k to 425k.

"Initial claims probably leapt back above 400,000, but held below recent highs," said Citigroup. "This follows a dramatic decline in the previous week that likely was a combination of a variety of factors including possible seasonal adjustment difficulty, fewer Irene-related filings and improved activity. Beneficiaries and the insured rate probably were unchanged, remaining near their respective six-month averages."

Friday:

8:30 - Economic uncertainty and stock market volatility creates a rough environment for companies to hire. Yet the expectation is the labor market grew modestly in September. Economists looks for 50k new jobs in the Employment Situation report - certainly not enough to keep up with population growth - but it's 50k more than in August. The Unemployment Rate should stay at 9.1%.

"Hiring was probably restrained by continuing extreme uncertainty over the outlook, while firings were probably more severe as initial unemployment insurance claims were higher than in August," said IHS Global Insight, predicting a 9.2% jobless rate. "We expect just 25,000 jobs added overall - meaning there would be a loss of 20,000 jobs but for the return to payrolls of 45,000 Verizon workers after a strike. We expect 70,000 private jobs added (just 25,000 ex-Verizon), and a loss of 45,000 government jobs, in line with recent trends."

Citigroup said September will be the fourth month of lackluster growth. 

"The private employment gain probably was notably larger than in August ut most of the pickup reflects the swing from 46,000 striking and then returning Verizon workers," Citi added. "We think government employment will continue to be a drag on payrolls. 

10:00 - Wholesale Inventories should pick up 0.6% in August, following a 0.8% gain in July and a 0.6% increase in June. 

"Energy prices dropped in August, which should lend downward pressure to wholesale inventories," said Nomura Global Economics.

3:00 - Economists expect outstanding Consumer Credit to grow by $8 billion in August, following back-t0-back gains of more than $10 billion ($12 billion in July and $11.3 billion in June). 

The July gain was driven solely by installment credit, which picked up $15.4 billion - the largest since November 2001 and the fifth largest in data going back to 1943, according to IHS Global Insight. Growing credit can be a good sign for the economy as it indicates a willingness among consumers to buy big-ticket items, but the latest data points to federal loans rather than produced goods.

"The fact that increased demand for student loans is behind the non-revolving bounce is not a good sign," IHS Global said. "It indicates that households are having more and more difficulties financing studies of their kids."

August data should also be driven in August motor vehicle purchases and student loans, according to Nomura. "For this reason, we expect non-revolving credit to account for nearly all of the increase."