MBS MID-DAY: 10/31/2011

Federal Housing Finance Agency Director Edward DeMarco on C-SPAN's Newsmakers with Reuters Housing Correspondent Margaret Chadbourn and Wall Street Journal Housing Correspondent Nick Timiraous.

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The Chicago Purchasing Managers reported the CHICAGO BUSINESS BAROMETER stabilized in October. The Business Barometer marked a 25th month of expansion, yet the 3 month moving average for the barometer fell for the 7th consecutive month. Monthly changes in the individual Business Activity components were generally modest with all but one component converging towards their 3 month moving averages.

-EMPLOYMENT highest in 6-months
-NEW ORDERS erased half of September's gain
-ORDER BACKLOGS recovered from a 2 month contraction

Selected comments from survey respondents:

- Global econ issues controlling commodity prices
- market volatility pushing us to lower inventory levels
- Business strong now, but 2012 looks weak
- Suppliers are trying for price increases
- Easing oil/gas prices will help the overall picture

When the Federal Reserve’s policy-making committee meets on Tuesday and Wednesday, 5 of the 10 voting members will arrive in open disagreement with the chairman, Ben S. Bernanke, about the direction of monetary policy. Three conservative members say the Fed has already done too much. Two liberals say the Fed needs to do much more.

But it is still the chairman who determines whether the central bank should expand its campaign to stimulate growth for the third time since August, and lately Mr. Bernanke has been focused on an old theme: communicating the benefits of existing policies in order to increase their impact.

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With the FOMC announcement and Non-Farm Payrolls not happening until Wednesday and Friday respectively, markets have been free to trade the ongoing shift back towards "risk-off." Volume and price action were progressively better for bonds since nocturnal markets began trading at 5pm yesterday. Stock futures mirrored the move in TSY Futures prices. Some of the headline drivers:

- An article earlier this weekend citing China's Xinhua as saying China could not be Europe's "savior."
- The Bank of Japan is embarking on aggressive measures to lower the value of the Yen
- MF Global general malaise seen dragging down "risk-on" sentiment overnight as well. They also got suspended by the NY Fed as a Primary dealer (a status only recently granted)
-And a whole slew of mildly bearish economic headlines out of Europe, including how recent EU Economic Data indicates a tough road ahead.

Cap all of the above off with the fact that it's the last day of the month and bonds might get a boost from more index buying (although some was certainly seen on Friday), and the day is shaping up well so far. 10yr yields are impressively back down to 2.22% and Fannie 3.5's are back at "what EFSF bailout?" price levels at 101-14, almost half a point better than Friday's close.

The key at this point is assessing the stability of this shift. If volume stays high enough to validate the price action, and the price action stays stable enough, not only should rate sheets be much improved this morning, but the near term outlook would seem on firmer footing and more ready to digest the upcoming economic events of the week. Today brings only Chicago PMI at 945am, a release that is several orders of magnitude less significant that FOMC and NFP, but a potential mover nonetheless.