MBS MID-DAY: 1/18/2012

Builder confidence in the market for newly built, single-family homes continued to climb for a fourth consecutive month in January, rising four points to 25 on the NAHB/Wells Fargo Housing Market Index (HMI), released today. This is the highest level the index has attained since June of 2007.

"Builder confidence has now risen four months in a row, with the latest uptick being universally represented across every index component and region," noted Bob Nielsen, chairman of the National Association of Home Builders (NAHB) and a home builder from Reno, Nev. "This good news comes on the heels of several months of gains in single-family housing starts and sales, and is yet another indication of the gradual but steady improvement that is beginning to take hold in an increasing number of housing markets nationwide -- and that has been shown by our Improving Markets Index. Policymakers must now take every precaution to avoid derailing this nascent recovery."

Industrial production increased 0.4 percent in December after having fallen 0.3 percent in November. For the fourth quarter as a whole, industrial production rose at an annual rate of 3.1 percent, its 10th consecutive quarterly gain. In the manufacturing sector, output advanced 0.9 percent in December with similarly sized gains for both durables and nondurables. The output of utilities fell 2.7 percent, as unseasonably warm weather reduced the demand for heating; the output of mines moved up 0.3 percent. At 95.3 percent of its 2007 average, total industrial production in December was 2.9 percent above its level of a year earlier. The capacity utilization rate for total industry rose to 78.1 percent, a rate 2.3 percentage points below its long-run (1972--2010) average.

• RTRS - Nov net overall capital inflow $48.6 bln vs revised $39.6 bln outflow in October
• RTRS - Nov net long-term inflow (ex-swaps/other) $59.8 bln vs rev $8.3 bln inflow in October
• RTRS - Nov net long-term inflow (incl. Swaps/other) $44.4 bln vs rev $5.2 bln outflow in October
• RTRS - Nov net foreign purchases of us treasury bonds, notes $54.0 bln vs $15.3 bln purchases in October
• RTRS - Nov net official capital inflow $20.4 billion vs rev $39.4 bln outflow in October
• RTRS - Nov net private capital inflow $28.2 bln vs rev $200 mln outflow in October
• RTRS - China u.s. treasury securities holdings $ 1.1326 trln in November vs $1.1341 trln in October
• RTRS - Japan u.s. treasury holdings $1.0389 trln in November vs $979 bln in October

Mortgage applications increased 23.1 percent from one week earlier (last week's results included an adjustment for New Years Day), according to data from the Mortgage Bankers Association's (MBA) Weekly Mortgage Applications Survey for the week ending January 13, 2012.

The Market Composite Index, a measure of mortgage loan application volume, increased 23.1 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index increased 38.1 percent compared with the previous week. The Refinance Index increased 26.4 percent from the previous week to its highest level since August 8, 2011. The seasonally adjusted Purchase Index increased 10.3 percent from one week earlier to its highest level since December 12, 2011. The unadjusted Purchase Index increased 28.4 percent compared with the previous week and was 2.2 percent higher than the same week one year ago.

The big story overnight cited an anonymous source within the IMF as saying the fund is proposing to boost its resources by $1 Trillion dollars. Shortly thereafter, that figure was corrected to $500 billion, which was just before it was again clarified as being more appropriately $600 billion. The point of confusion on this aspect was apparently due to sources from the IMF discussion saying the $500 bln component is for lending to member countries with another $100 bln as a "protective buffer." The point of confusions on the intial claim of $1 trl dollar boosts was apparently due to IMF sources estimating a $1 trln global financing gap over the next two years if global economic conditions continue to deteriorate.

As one might expect, the initial "$1 trln" report helped fuel some "risk-on" type trading, favoring stocks and negative for bond markets, but the $500 bln correction along with what seems to be a burgeoning skepticism over high-dollar bailout fund increase announcements soon saw Treasuries correct back to yesterday's latest levels from the domestic session.

Speaking of things that aren't perceived as much of a threat compared to past examples, the recently released PPI showing the biggest year-over-year rise in core producer inflation since mid 2009 failed to put any pressure on bond markets. 10's are 2 bps lower in yield and MBS 3 ticks higher since the report. The just-released "Treasury International Capital" data for November isn't hurting us, as it continues to paint portions of the the big picture demand for US Treasuries in very favorable light.

Headline inflation at the producer level fell by 0.1% in December according the BLS. Economists polled by Reuters had been expecting at 0.1% increase after November's 0.3% rise. But the more closely watched Core Producer Price Index which strips out food and energy rose by 0.3% versus expectations of a 0.1% gain. This was the biggest move up for core producer prices since July and the year-over-year increase was the largest since June 2009. The BLS notes that nearly 1/3rd of this rise can be attributed to light motor trucks.

There has been little by way of market reaction to the data both in terms of price action and volume. Both 10yr yields and Fannie 3.5 MBS continue to trade at, or very close to, 830am levels. Inflation reports have become increasingly less important to the market after getting over it's courtship phase with the quantitative easing.