MBS MID-DAY: 1/5/2012

As we're fond of mentioning, MBS rallies that occur fairly early in the trading day present somewhat of a problem with respect to commenting on the potential for positive reprices.

In and of itself, the shape of MBS trading so far this morning would probably justify positive reprices from a few of the characteristically early lenders, but two main caveats apply and must be considered.

First, when did the lender in question release rates? Line up the rate sheet print time to the MBS price chart and see how gains have been since then. Second, even if the lender didn't release rates at a trough in prices, perhaps they were still somewhat conservative due to morning volatility. In that case, it may be more a factor of TIME as opposed to outright GAINS.

So you'll have to add in some of your own knowledge on such occasions, but either way, we can at least let you know that MBS are operating near their highs of the day (around 102-30 in Fannie 3.5's) and the shape of trading is consistent with a few past instances of morning reprices from a small group of lenders.

Counterpoint: Looks like both MBS and TSYs are encountering some resistance here though, and with NFP ahead tomorrow, lenders and markets alike could be more conservative than they otherwise might be.

• RTRS - ISM REPORT ON U.S. NON-MANUFACTURING SECTOR SHOWS PMI AT 52.6 IN DECEMBER (CONSENSUS 53.0) VS 52.0 IN NOV
• RTRS - ISM NON-MANUFACTURING BUSINESS ACTIVITY INDEX 56.2 IN DECEMBER (CONSENSUS 55.4) VS 56.2 IN NOV
• RTRS - ISM NON-MANUFACTURING NEW ORDERS INDEX 53.2 IN DECEMBER VS 53.0 IN NOV
• RTRS - ISM NON-MANUFACTURING EMPLOYMENT INDEX 49.4 IN DECEMBER VS 48.9 IN NOV
• RTRS - ISM NON-MANUFACTURING PRICES PAID INDEX 61.2 IN DECEMBER VS 62.5 IN NOV

(Reuters) - New U.S. claims for unemployment benefits fell by 15,000 last week in the latest sign the labor market was improving and could help the country resist the effects of a likely euro zone recession.

Initial claims for state unemployment benefits dropped to a seasonally adjusted 372,000, the Labor Department said on Thursday. The prior week's claims data was revised up to 387,000 from the previously reported 381,000.

Economists polled by Reuters had forecast claims falling to 375,000. A Labor Department official said there was nothing unusual in the data, although the figures for three states, including California and Virginia, had been estimated.

Claims have now fallen in four of the last five weeks, and the four-week moving average - a better measure of trends - fell 3,250 to 376,500, the lowest level since June 2008.

The overnight session was fairly lackluster although volume clearly continues to build into the new year. 10yr yields traded a range inside the highs and lows offered by Wednesday's domestic session and opened this morning just slightly stronger until getting hit by a much stronger than expected ADP Jobs report (325k Private payrolls vs 178k forecast). Naturally, this thing has a history of being questionably correlated to private payrolls from Non-Farm-Payrolls reports, but the sad fact for bond-bulls and naysayers is that the two do line up fairly well over time.

And so it is that Treasuries and MBS experiences by far, their biggest shockwave in terms of volume and price action following those numbers. 10's were fairly quick to acknowledge the overhead resistance at the 3-month trend channel and now sit just a hair over 2.00 as markets begin to digest the next iteration of labor market data of the morning which is the Jobless Claims report that just came out fairly close to consensus. So far, this hasn't added any selling pressure in bond markets. Fannie 3.5's are down only 3 ticks at 102-22. ISM Non-Manufacturing data is up next at 10am.