MBS MID-DAY: 11/15/2011

FHFA drew $13.8 billion in Q311 from Treasury, $4.1 bln of which was simply to pay interest on previous draws. “The Single-Family Credit Guarantee segment continued to drive losses as credit-related expenses remained high.” But if house prices moderate that the GSE's might be able to cash-flow those interest payments. Here are some highlights:

Credit Quality of New Single-Family Book of Business The quality of new business remained high in the third quarter of 2011. The percentage of new business volume with FICO scores below 620 remained below two percent and the average loan-to-value ratio (LTV) for new business was roughly 70 percent for both Enterprises, reflecting in part the high degree of refinance activity.

Loss Mitigation Activity Since conservatorship, the Enterprises have completed 1.9 million foreclosure prevention transactions, of which nearly 1 million have been permanent loan modifications and another 650,000 have been other forms of assistance that have allowed homeowners to retain homeownership. Separately, another 260,000 transactions have resulted in households leaving their homes but without going through foreclosure. Most of these actions have been short sales.

Projections of Financial Performance To provide additional information on future Enterprise financial performance, beginning in October 2010, FHFA published financial projections of the Enterprises’ financial performance across different house price scenarios. Those initial projections were updated a few weeks ago, and the projected combined cumulative Treasury draws (which includes 10 percent dividend payments to Treasury) through the end of 2014 range between $220 and $311 billion. In general, these financial projections show that under less stressful house price scenarios, the cumulative draws from Treasury would stabilize in the next year or so, with the Enterprises earning enough income to cover dividend payments to Treasury.

(Reuters) - U.S. business inventories failed to increase in September for the first time since December 2009, a government report showed on Tuesday, pointing to a downward revision to the third-quarter growth estimate.

The Commerce Department said inventories were unchanged at $1.53 trillion after rising a revised 0.4 percent in August. Economists polled by Reuters had forecast inventories edging up 0.1 percent after a previously reported 0.5 percent increase in August.

Inventories are a key component of gross domestic product changes and September's flat reading implied the 2.5 percent annual growth pace for the third quarter could be lowered next week when the government publishes its second estimate.

But the anticipated downward revision will be offset by a smaller trade deficit in September. The careful management of inventories by businesses is, however, positive for fourth-quarter output.Retail stocks fell 0.1 percent, mostly caused by a decline of 0.9 percent in inventories at auto dealers.

Business sales rose 0.6 percent in September to $1.21 trillion, the highest level since July 2008, after gaining 0.4 percent the prior month. The inventory-to-sales-ratio -- which measures how long it would take to clear shelves at the current sales pace - was unchanged at 1.27 months. (Reporting by Lucia Mutikani; Editing by Neil Stempleman)

HUD today released its annual report to Congress on the financial status of the Federal Housing Administration (FHA) Mutual Mortgage Insurance (MMI) Fund. This insurance Fund is the backbone of the FHA single-family and reverse mortgage programs. In reporting on findings of the annual independent actuarial study, HUD indicates that, in the midst of continued weakness in housing markets across the county, the MMI Fund capital ratio remains positive this year at 0.24 percent. With new risk controls and premiums put in place by the Obama Administration, the independent actuaries predict the Fund will return to the Congressionally-mandated threshold of two percent capital more quickly than was projected by last year’s review. The economic value of new insurance endorsements in FY 2011 for the Fund was nearly double that of FY 2010 endorsements, being close to $11 billion.

As was the case last year, the new actuarial study shows that FHA is expected to sustain significant losses from loans insured prior to 2009, and thus its capital reserve remains below the congressionally mandated threshold of two percent of total insurance-in-force. However, the actuaries’ report concludes that, barring a further significant downturn in home prices, the MMI Fund will start to rebuild capital in 2012, and return to a level of two percent by 2014 – outpacing last year’s prediction. The actions taken by this Administration have put FHA into a position where the actuaries expect rapid growth in capital once the housing market begins a broad-based recovery.

Since HOPE NOW began reporting data in 2007, it is estimated that the mortgage industry has completed 4.97 million loan modifications for homeowners (through September 2011). This includes more than 4.11 million proprietary modifications and 856,974 completed under the Home Affordable Modification Program (HAMP) through September 2011. Based on current trends, the industry has surpassed the five million loan modification milestone to date.

*RTRS-BULLARD - IF FURTHER MONETARY ACCOMMODATION NECESSARY, PROMISED DATE OF FIRST RATE INCREASE COULD BE MAIN TOOL

*RTRS-BULLARD SAYS NOT CLEAR HOW CREDIBLE PROMISED DATE OF FIRST RATE INCREASE WOULD BE

*RTRS-BULLARD - ASSET PURCHASES A POTENT MONETARY POLICY TOOL, BUT MUST BE USED CAREFULLY DUE TO INFLATION RISKS

*RTRS-BULLARD - "UNWISE" TO TIE MONETARY POLICY DIRECTLY TO LEVEL OF UNEMPLOYMENT

*RTRS-BULLARD - ECONOMY CONTINUES TO SHOW MODERATE GROWTH

*RTRS-BULLARD - EUROPE TOO DISTANT FOR DEBT CRISIS TO CHANGE U.S. HOUSEHOLD SPENDING BEHAVIOR, BUSINESSES ARE AIMED AT ASIA

(Reuters) - A gauge of manufacturing in New York state rose in November, ending five straight months of contraction, while the outlook for coming months strengthened, the New York Federal Reserve said in a report on Tuesday.

The New York Fed's "Empire State" general business conditions index rose to 0.61, marking the first time the index has been in positive territory since May and up from minus 8.48 the month before. Economists polled by Reuters had expected a reading of minus 2.1.

New orders fell to minus 2.07 from plus 0.16, while inventories dipped to minus 12.2 from minus 8.99.

Employment gauges were mixed. The index for the number of employees fell to minus 3.66 from plus 3.37 in October and the average employee workweek index rose to 2.44 from minus 4.49.

The index of business conditions six months ahead jumped to to plus 39.02 in November from plus 6.74 in October.

The survey of manufacturing plants in the state is one of the earliest monthly guideposts to U.S. factory conditions. (Reporting by Chris Reese; Editing by James Dalgleish)

(Reuters) - U.S. retail retail sales increased 0.5 percent, the Commerce Department said on Tuesday, after rising by an unrevised 1.1 percent in September. Economists polled by Reuters had forecast retail sales climbing 0.3 percent last month. In the 12 months to October, retail sales were up 7.2 percent.

Consumer spending -- which accounts for more than two-thirds of U.S. economic activity -- rose at its fastest pace in nearly a year in the third quarter. But households are significantly cutting back on saving to fund their spending. Retail sales last month rose as receipts from motor vehicle dealers increased 0.4 percent, adding to the prior month's 4.2 percent gain. Excluding autos, retail sales rose 0.6 percent, the largest increase in seven months, after advancing 0.5 percent in September.

Sales at food and beverage stores increased 1.1 percent, while receipts at sporting goods, hobby, book and music stores gained 1.3 percent. Sales of electronics and appliances soared 3.7 percent, while receipts from building material retailers increased 1.5 percent.

But clothing store sales fell 0.7 percent last month, the largest decline since December 2010, while furniture sales declined 0.7 percent.

Receipts at gasoline stations fell 0.4 percent last month after rising 0.7 percent. The decline reflects weak gasoline prices. According to the U.S. Energy Information Administration, gasoline prices fell 4.39 percent or 16 cents to $3.506 a gallon in October. Excluding gasoline, retail sales rose 0.7 percent.

Core retail sales, which exclude autos, gasoline and building materials, rose 0.7 percent in October after advancing 0.5 percent the prior month. (Reporting by Lucia Mutikani; Editing by Neil Stempleman)

(Reuters) - U.S. producer prices fell for the first time in four months during October on lower prices for gasoline and consumer goods like passenger cars and men's clothing, a government report showed on Tuesday.

The Labor Department said its seasonally adjusted index for prices received by farms, factories and refineries fell 0.3 percent after rising 0.8 percent in September. Economists polled by Reuters had expected prices to fall 0.1 percent.

Excluding volatile food and energy, core wholesale prices were flat last month after climbing 0.2 percent in September. That below economists' expectations for a 0.1 percent gain.

Gasoline prices fell 2.4 percent during the month, while men's apparel dropped 1.3 percent. Helping keep the core reading from turning negative, prices rose for alcoholic beverages and children's toys.

Passenger cars fell 0.8 percent, while food prices rose 0.1 percent. In the 12 months to October, producer prices increased 5.9 percent, decelerating from September's 6.9 percent advance.

The core 12-month reading rose to 2.8 percent from 2.5 percent, the highest since June 2009. (Reporting by Jason Lange, Editing by Andrea Ricci)

No shockingly negative or positive headlines or happenings stand out from the overnight session, but the general theme leans toward weakness and risk aversion centered on the European Periphery. Italy's new PM is having some trouble forming a new cabinet. Greece is having some trouble agreeing on new austerity measures, and a report ranked France 13/17 among Euro-Zone members in terms of economic competitiveness.

All of the above has Treasuries rallying decently with the 10yr down around 4bps to around 2% at the moment. The lower MBS stack is slightly improved with Fannie 3.5's up a few ticks to 101-21 as the upper stack continues to struggle with anxiousness over today's expected HARP 2.0 details. The economic calendar is fully packed today. Here's the run-down:

- Producer Price Index - 830am. Core inflation at the producer level is seen at +0.1 pct after last month's rise of 0.2 pctm while the headline is expected to show a bigger swing from last month's 0.8 pct rise to a 0.1 pct decline this month. Focus on the core reading, both for the month-over-month metric as well as year-over-year, which is expected to fall to 6.3% from 6.9%

-Retail Sales - 830am. Large drops are expected on the headline (1.1 pct gain last month vs an expected 0.3 pct gain this month) as well as excluding the automotive sector (0.6 pct gain last month vs tomorrow's consensus of +0.1 pct)

-Empire State Manufacturing Survey - 830am. Forecast: -2.1, which would be an improvement from the previous reading of -8.48

-Business Inventories - 10am. Seen falling from last month's print of 0.5 pct to 0.1 pct

-Fed-Speak from Bullard, Williams, and Fisher

-Fed Treasury buying: $4.25 to $5.0 bln in the 6-8yr sector

If MBS stay on the flat side this morning, we'd set the first layer of alerts at 100-16 to 100-18. The first logical upside target is 101-26 and we'll reassess when/if either of those are taken down.