MBS MID-DAY: 10/4/2011

New orders for manufactured goods in August, down two of the last three months, decreased $0.8 billion or 0.2 percent to $451.0 billion, the U.S. Census Bureau reported today. This followed a 2.1 percent July increase. Excluding transportation, new orders decreased 0.2 percent.

Shipments, down following two consecutive monthly increases, decreased $0.9 billion or 0.2 percent to $450.2 billion. This followed a 1.2 percent July increase.

Unfilled orders, up sixteen of the last seventeen months, increased $7.6 billion or 0.9 percent to $878.8 billion. This followed a 0.9 percent July increase. The unfilled orders-to-shipments ratio was 6.08, up from 6.06 in July.

Inventories, up twenty two of the last twenty three months, increased $2.4 billion or 0.4 percent to $601.2 billion. This was at the highest level since the series was first published on a NAICS basis in 1992 and followed a 0.6 percent July increase. The inventories-to-shipments ratio was 1.34, up from 1.33 in July.

(Reuters) - The Federal Reserve is prepared to take further steps to help a fragile economic recovery held back by a weak job market and financial stresses in Europe, Fed Chairman Ben Bernanke said on Tuesday.

"The Committee will continue to closely monitor economic developments and is prepared to take further action as appropriate to promote a stronger economic recovery in the context of price stability," Bernanke said.

Given a anemic employment growth that has depressed consumer confidence, Bernanke urged lawmakers not to cut spending too quickly in the short-term, even as they grappled with trimming the budget deficit over the long term. He said government belt-tightening was likely to prove a significant drag on the world's largest economy, which averaged less than 1 percent annualized growth in the first half of the year.

"A(n) important objective is to avoid fiscal actions that could impede the ongoing economic recovery," he said. Bernanke said European financial strains posed "ongoing risks" to U.S. economic growth, saying they had already dampened the mood of households and businesses.

Stressing that higher inflation earlier in the year had not become ingrained in the economy, Bernanke argued price pressures will remain subdued for the foreseeable future. (Reporting by Pedro Nicolaci da Costa and Mark Felsenthal; Editing by Neil Stempleman)

Not much by way of market-moving events in the overnight session though bond markets traded a bit weaker. But by the time US alarm clocks rang, 10yr notes were lower in yield than their 3pm close (1.76 vs 1.78). And while 1.76 has been a generally supportive ceiling for TSY yields so far this morning, MBS continue to lag.

Yes, even with Fed buying, MBS can't keep up with "risk-off" for Treasuries. Throw Operation Twist into the mix with global economic uncertainty, the desuetude of Fannie/Freddie, not to mention the MBS reinvestment program itself, and there are so many curveballs in the air that MBS have more than just the risk-off trade to worry about.

And if we sell-off, supply will ramp up so quickly that we won't even see the same level of spread tightening that normally accompanies bond-market weakness. It's a challenging road ahead for MBS. Expect some weakness relative to TSYs by default.

Even so, Fannie 3.5's at 103-03 is the kind of weakness we can tolerate. Things have been a bit choppy this morning, potentially delaying some rate sheets, but they should be in the same ball-park as yesterdays (caveat: "pipeline-control" pricing is a risk). The next major data hits in about 15 minutes with Bernanke talking to Congress with Factory Orders data playing second fiddle.