MBS MID-DAY: 12/5/2011

(Reuters) - New orders for factory goods fell in October for the second straight month, suggesting a possible softening in the manufacturing sector, which has supported the economic recovery.

The Commerce Department said on Monday orders for manufactured goods decreased 0.4 percent after a 0.1 percent drop in September.

Economists had forecast orders would fall 0.3 percent after a previously reported 0.3 percent increase in September.

The report showed orders excluding transportation rose 0.2 percent.

Orders for transportation equipment dipped 5.1 percent in October as demand for civilian aircraft dropped 16.8 percent. Orders for motor vehicle and parts rose 2.3 percent.

The department said orders for durable goods, manufactured products expected to last three years or more, fell 0.5 percent, a smaller decline than initially estimated. Durable goods orders excluding transportation were up a revised 1.1 percent, stronger than the initial report in November. Orders for non-defense capital goods excluding aircraft fell 0.8 percent, a more modest decline than originally reported.

The NMI registered 52 percent in November, 0.9 percentage point lower than the 52.9 percent registered in October, and indicating continued growth at a slightly slower rate in the non-manufacturing sector. This is the lowest reading since January 2010, when the index registered 50.7 percent.

The Non-Manufacturing Business Activity Index increased 2.4 percentage points to 56.2 percent, reflecting growth for the 28th consecutive month. The New Orders Index increased by 0.6 percentage point to 53 percent. The Employment Index decreased 4.4 percentage points to 48.9 percent, indicating contraction in employment after one month of growth.

The Prices Index increased 5.4 percentage points to 62.5 percent, indicating prices increased at a faster rate in November when compared to October. According to the NMI, 12 non-manufacturing industries reported growth in November. Respondents’ comments for the most part project continued slow, incremental growth. There still remains a strong concern about lagging employment.”

Mortgagee Letter 2011-39
Subject: Federal Housing Administration Maximum Loan Limits Effective October 1, 2011 through December 31, 2012

Purpose: This Mortgagee Letter provides: Notice of the comprehensive update to the Federal Housing Administration’s (FHA) single-family loan limits, issued under the authority of H.R. 2112, the Consolidated and Further Continuing Appropriations Act, 2012, Public Law 112-55. These limits apply to Forward mortgages insured under the following sections of the National Housing Act (NHA): 203(b) (FHA’s basic 1-4 family mortgage, including condominiums), 203(h) (mortgages for disaster victims), and 203(k) (rehabilitation mortgage insurance)…

MORTGAGEE LETTER 2011-38
SUBJECT: Secondary Financing Eligibility Requirements for IRC Section 115 Nonprofits Rescission of Mortgagee Letter 2009-38

Purpose: Mortgagee Letter 2009-38 announced that the Department of Housing and Urban Development allowed, on a temporary basis, nonprofit instrumentalities of government eligible for approval by the Federal Housing Administration (FHA) to include entities whose income is excluded from Federal taxation under section115 of the Internal Revenue Code of 1986 (IRC) (Section 115 nonprofit instrumentalities of government). Eligible Section 115 nonprofit instrumentalities of government were placed on the FHA Nonprofit Organization Roster (Roster) and allowed to participate in single-family housing programs as providers of secondary financing...

(Reuters) - European stocks rose early on Monday, adding to last week's 8.5 percent jump on growing hopes of a comprehensive solution to the euro zone debt crisis as French President Nicolas Sarkozy and German Chancellor Angela Merkel meet ahead of a key summit.

Italy's fresh 30 billion euro package of austerity measures also eased tensions surrounding the country's finances and sparked a rally in Italian shares, with Milan's FTSE MIB index up 3.1 percent while Italian 10-year bond yields dropped towards 6 percent.

"Markets now seem to want to believe that Merkel and Sarkozy will come out with a common point of view and a lot of austerity and structural measures to bring down the debt and increase competitiveness," said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets in Brussels.

"And when you listen at their speeches, it looks like the points of view which were far apart clearly have come closer together. If they manage to come to an understanding, they still have to sell some of these very unpopular measures to the rest of Europe. And this would open the door for the European Central Bank to get more involved."

Meeting in Paris on Monday ahead of a key European Union summit later in the week, Sarkozy and Merkel are under pressure to iron out their differences on how to centralize control of euro zone budgets to resolve the region's debt crisis.

The two leaders, who are due to meet at 1230 GMT on Monday and are expected to hold a news conference afterwards, will try to reach common ground on measures to boost coercive budget discipline in the euro zone, likely via EU treaty change, which they want all 27 EU leaders to approve at Friday's summit.

In 1984, the world had no idea that the "wax-on, wax-off" scene from the new Karate Kid movie would still be serving as the foundation for satirical allusion more than 2 decades later. Yet here we are this morning with no better way than to describe the ebbs and flows in bond markets as "risk-on, risk-off."

During the overnight session, safe-haven buying waned as Italy's Monti "waxed-on" (you see what I did there?!) about the just-announced €30 bln austerity package. Monti told it like it was in saying that the plan worsens the recession but prevents a total collapse. Reaction was positive (Dutch PM "impressed," spokesman for EU's Rehn reiterates positive opinion) , and Italian spreads to EU benchmark Bunds moved much tighter.

After dominating the overnight headline scene, it only made sense to continue to listen to Monti early this morning when he said the "Euro Summit must strengthen fiscal cooperation, EFSF Capacity" (RTRS). That seemed to jive well with an article in the UK Sunday times declaring: “A €1 trillion cash injection for the troubled eurozone economy is being prepared by the European Central Bank ahead of a series of key crisis summits this week.” Against the backdrop of an almost non-existent domestic economic calendar this week, we're exceedingly susceptible to the same sort of speculative run-up to an EU Summit that we saw the last time there was, well.... a speculative run-up to an EU Summit.

10yr yields are already up 7+bps at 2.107, but MBS are as-yet, presenting a silver lining, down only 7 ticks this morning at 101-30 in Fannie 3.5's. A Hilsenrath piece in the WSJ which primarily served to hint at next week's increased transparency efforts also made mention of MBS. Considering that Hilsenrath is widely-regarded as the FOMC's personal press-release department, this adds to the expectation for QE3: MBS.