MBS MID-DAY: 12/15/2011

Responses to the Business Outlook Survey this month suggest that regional manufacturing continued to improve in December. All of the broad indicators remained positive and suggest a modest expansion of activity. Increases in input prices were more widespread this month, and there was an uptick in the number of firms reporting increased prices for their own goods. The broadest indicator of future activity reflected a trend of increased optimism about growth over the next six months.

• BUSINESS CONDITIONS DECEMBER 10.3 (CONSENSUS 5.0) VS NOV 3.6
• NEW ORDERS INDEX DECEMBER 9.7 VS NOV 1.3
• EMPLOYMENT INDEX DECEMBER 10.7 VS NOV 12.0
• BUSINESS CONDITIONS INDEX AT HIGHEST SINCE APRIL 2011
• 6-MONTH BUSINESS CONDITIONS INDEX AT HIGHEST SINCE MARCH

Today, Fannie Mae (FNMA/OTC) announced Servicer Total Achievement and Rewards (STAR) Program results through the third quarter of 2011. The STAR program, announced in February 2011, measures the performance of servicers with an emphasis on foreclosure prevention. Encouraging servicer improvements through the STAR Program is an important component of Fannie Mae’s overall efforts to prevent foreclosures and stabilize neighborhoods.

Industrial production decreased 0.2 percent in November after having advanced 0.7 percent in October. Factory output moved down 0.4 percent in November; excluding a drop of 3.4 percent in the output of motor vehicles and parts, manufacturing production declined 0.2 percent. Mining production edged up 0.1 percent, while the output of utilities rose 0.2 percent. At 94.8 percent of its 2007 average, total industrial production for November was 3.7 percent above its year-earlier level. Capacity utilization for total industry decreased to 77.8 percent, a rate 2.0 percentage points above its level from a year earlier but 2.6 percentage points below its long-run (1972--2010) average.

After the massive glut of domestic economic data this morning, MBS and Treasuries are understandably under some selling pressure, but have been holding their ground admirably considering some of the data's more economically bullish suggestions.

Even with Jobless Claims falling to their lowest level in more than 3 years, Empire State Index at its highest since May, and a slightly higher than expected headline PPI (+0.3 vs 0.2 consensus, although the Core was 0.1% lower than consensus), the fact that 10yr yields remain in the low-to-mid 1.9's is either very much impressive or very much an indication of just how important Europe is at the moment. Indeed, little else could account for the uncommonly triumphant performances of this week's core Treasury auctions.

All that said, yields have been rising steadily since the data and 10's are now close to 1.94 after opening near 1.90. Fannie 3.5 MBS are 2 ticks down on the day, but about 8 ticks down from the more indicative 3pm closing marks.

Despite data out of Europe overnight (lots of Spanish Auction news and lots of ECB Pres. Draghi comments) we're definitely seeing the domestic session as the chief market mover this morning as opposed to European headlines from the nocturnal session.

There's more data ahead as well... Treasury International Capital hits in moments at 9am. Industrial Production and Capacity Utilization 15 minutes later at 9:15am, and the "biggie" of the late-morning data, Philly Fed at 10am.

RTRS - Q3 CURRENT ACCOUNT DEFICIT $110.28 BLN (CONSENSUS $107.5 BLN BLN), Q2 DEFICIT $124.72 BLN (PREV $118.00 BLN)

RTRS - CURRENT ACCOUNT DEFICIT EQUAL TO 2.9 PCT OF GDP VS 3.3 PCT IN Q2-COMMERCE DEPT

RTRS - CURRENT ACCOUNT DEFICIT SMALLEST SINCE Q4 2009 ($100.6 BLN)

RTRS - PPI +0.3 PCT (CONSENSUS +0.2 PCT), VS OCT -0.3 PCT

RTRS - PPI EXFOOD/ENERGY +0.1 PCT (CONS +0.2 PCT) VS OCT 0.0 PCT

RTRS - YEAR-OVER-YEAR PPI +5.7 PCT (CONS +5.8 PCT), CORE +2.9 PCT (CONS +2.9 PCT)

RTRS - PPI INTERMEDIATE GOODS +0.2 PCT, EXFOOD/ENERGY -0.4 PCT

RTRS - PPI CRUDE GOODS +3.8 PCT, EXFOOD/ENERGY -2.5 PCT

RTRS - PPI ENERGY +0.1, GASOLINE -0.1 PCT, HEATING OIL +9.4 PCT

RTRS - PPI FOOD +1.0 PCT, TOBACCO +0.1 PCT, PASSENGER CARS +0.6 PCT, LIGHT TRUCKS -0.2 PCT

RTRS - PPI EXFOOD/ENERGY YEAR-OVER-YEAR RISE LARGEST SINCE JUNE 2009 (+3.3 PCT)

RTRS - NY FED'S EMPIRE STATE BUSINESS CONDITIONS INDEX +9.53 IN DECEMBER (CONSENSUS +3.0) VS +0.61 IN NOVEMBER

RTRS - EMPLOYMENT INDEX AT +2.33 IN DECEMBER VS -3.66 IN NOVEMBER

RTRS - NEW ORDERS INDEX +5.10 IN DECEMBER VS -2.07 IN NOVEMBER

RTRS - PRICES PAID INDEX +24.42 IN DECEMBER VS +18.29 IN NOVEMBER

RTRS - SIX-MONTH BUSINESS CONDITIONS INDEX +52.33 IN DECEMBER VS +39.02 IN NOVEMBER

RTRS - BUSINESS CONDITIONS INDEX, 6-MONTH CONDITIONS INDEX, NEW ORDERS INDEX ALL AT HIGHEST SINCE MAY 2011

RTRS - JOBLESS CLAIMS FELL TO 366,000 DEC 10 WEEK (CONSENSUS 390,000) FROM 385,000 PRIOR WEEK (PREVIOUS 381,000)

RTRS - 4-WK AVG FELL TO 387,750 DEC 10 WEEK FROM 394,250 PRIOR WEEK (PREVIOUS 393,250)

RTRS - CONTINUED CLAIMS ROSE TO 3.603 MLN (CON. 3.630 MLN) DEC 3 WEEK FROM 3.599 MLN PRIOR WEEK (PREV 3.583 MLN)

RTRS - INSURED UNEMPLOYMENT RATE UNCHANGED AT 2.9 PCT DEC 3 WEEK FROM 2.9 PCT PRIOR WEEK (PREV 2.8 PCT)

RTRS - LOWEST SINCE MAY 31, 2008 WEEK (365,000), 4-WK MOVING AVGE LOWEST SINCE JULY 12, 2008 WEEK (385,000)