MBS MID-DAY: 2/1/2012

Longer-dated Treasury yields continued to climb this morning after the latest round of economic data showed improved construction spending and ongoing, albeit moderate strength in the manufacturing sector. 10yr yields have risen 4 bps since 8:40AM and now stand at 1.84.

MBS are faring much better by comparison with Fannie 3.5's down only 2 ticks at the moment to 103-26 (all-time highs are only 3-4 ticks higher). We're probably not far enough into the day, nor have we experienced sufficient losses to be concerned about reprices for the worse, but the general, underlying tone at the moment is one of weaker bond markets and stronger stocks.

Obama is expected to be talking about expanding government refinance initiatives in about half an hour.

The U.S. Census Bureau of the Department of Commerce announced today that construction spending during December 2011 was estimated at a seasonally adjusted annual rate of $816.4 billion, 1.5 percent (±1.4%) above the revised November estimate of $804.0 billion. The December figure is 4.3 percent (±1.9%) above the December 2010 estimate of $782.9 billion. The value of construction in 2011 was $787.4 billion, 2.0 percent (±1.1%) below the $803.6 billion spent in 2010.

PRIVATE CONSTRUCTION

Spending on private construction was at a seasonally adjusted annual rate of $529.7 billion, 2.1 percent (±1.1%) above the revised November estimate of $518.8 billion. Residential construction was at a seasonally adjusted annual rate of $241.2 billion in December, 0.8 percent (±1.3%)* above the revised November estimate of $239.4 billion. Nonresidential construction was at a seasonally adjusted annual rate of $288.5 billion in December, 3.3 percent (±1.1%) above the revised November estimate of $279.4 billion.

PUBLIC CONSTRUCTION

In December, the estimated seasonally adjusted annual rate of public construction spending was $286.6 billion, 0.5 percent (±2.1%)* above the revised November estimate of $285.3 billion. Educational construction was at a seasonally adjusted annual rate of $70.6 billion, 0.6 percent (±3.4%)* below the revised November estimate of $71.1 billion. Highway construction was at a seasonally adjusted annual rate of $84.5 billion, 1.8 percent (±5.0%)* above the revised November estimate of $82.9 billion.

• RTRS - CONSTRUCTION SPENDING +1.5 PCT (CONSENSUS +0.6 PCT) TO $816.4 BLN VS NOV +0.4 PCT (PREV +1.2 PCT)
• RTRS - PRIVATE CONSTRUCTION SPENDING +2.1 PCT, PUBLIC SPENDING +0.5 PCT
• RTRS - 2011 CONSTRUCTION SPENDING $787.4 BLN, -2.0 PCT FROM 2010

Economic activity in the manufacturing sector expanded in January for the 30th consecutive month, and the overall economy grew for the 32nd consecutive month, say the nation's supply executives in the latest Manufacturing ISM Report On Business®.

"The PMI registered 54.1 percent, an increase of 1 percentage point from December's seasonally adjusted reading of 53.1 percent, indicating expansion in the manufacturing sector for the 30th consecutive month. The New Orders Index increased 2.8 percentage points from December's seasonally adjusted reading to 57.6 percent, reflecting the 33rd consecutive month of growth in new orders. Prices of raw materials increased for the first time in the last four months. Manufacturing is starting out the year on a positive note, with new orders, production and employment all growing in January."

• RTRS - PMI AT 54.1 IN JANUARY (CONSENSUS 54.5) VS REVISED 53.1 IN DEC
• RTRS - NEW ORDERS INDEX 57.6 IN JANUARY VS REVISED 54.8 IN DEC
• RTRS - EMPLOYMENT INDEX 54.3 IN JANUARY VS REVISED 54.8 IN DEC
• RTRS - PRICES PAID INDEX 55.5 IN JANUARY (CONSENSUS 49.5) VS 47.5 IN DEC
• RTRS - MANUFACTURING ACTIVITY INDEX AT HIGHEST SINCE JUNE
• RTRS - NEW ORDERS INDEX AT HIGHEST SINCE APRIL

WSJ Reported earlier that White House is "expected to announce a fresh bid to revive the housing market Wednesday". CNBC has stated that it will not be the major overhaul announcement. We'll see at 11am.

Watch it here live at 11am

Bond markets were slightly weaker in the overnight session on what can most succinctly be described a modest uptick in data and events that favored "risk-on." Various pieces of economic data in Europe were stronger, auctions were successful, hope springs eternal for Greek bond-swap negotiations, and 10yr Treasuries rose all of a few small bps to the high 1.82's

Things have since moderated about 1-2 bps in our favor. 10's are just under 1.81 and Fannie 3.5's are a scant tick lower on the day at 103-28.

The next econ data hits at 10am with Construction Spending and ISM Manufacturing. Additionally, Obama is expected to announce the expansion of government refi initiatives aimed at delivering HARP-like benefits to borrowers NOT currently in a Fannie/Freddie loan.

Pivot points in Fannie 3.5's today: 103-26 would be the first line of defense, followed by 103-20 and 103-16. On the upside, it's hard to comment on pivots without getting overly-theoretical, considering there's no precedent for prices any higher than today's highs.

The Federal Housing Finance Agency (FHFA) today announced the first step of a Real-Estate Owned (REO) Initiative targeted to hardest-hit metropolitan areas announced in August 2011. Investors interested in participating may “pre-qualify” to establish eligibility to bid on transactions in the initial pilot phase as well as subsequent phases. The REO Initiative will allow qualified investors to purchase pools of foreclosed properties with the requirement to rent the purchased properties for a specified number of years. This rental period could provide relief for local housing markets that continue to be depressed by the volume of foreclosed properties, and provide additional rental options to certain markets. Prequalification ensures investors will have the financial capacity and operational expertise to manage properties in a way that is conducive to the stabilization of communities hard hit by the housing downturn...

• RTRS - U.S. FED'S PLOSSER SAYS DID NOT SUPPORT FED'S EXTENSION OF ULTRA LOW RATES THROUGH LATE 2014
• RTRS - FED'S PLOSSER SAYS EXTENSION FROM MID-2013 FORECAST RISKED UNDERMINING CONFIDENCE
• RTRS - FED'S PLOSSER: POLICY SHOULD BE CONTINGENT ON ECONOMIC ENVIRONMENT, NOT THE CALENDAR
• RTRS - FED'S PLOSSER: FOMC'S STATEMENT CAUSING CONFUSION; THERE ARE BETTER WAYS TO COMMUNICATE
• RTRS - FED'S PLOSSER: LITTLE JUSTIFICATION TO FURTHER EASE MONETARY POLICY; MUST PROCEED WITH CAUTION
• RTRS - FED'S PLOSSER: INFLATION TO BE MONITORED CAREFULLY DUE TO VERY ACCOMMODATIVE MONETARY POLICY

The Market Composite Index, a measure of mortgage loan application volume, decreased 2.9 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index increased 9.0 percent compared with the previous week. The Refinance Index decreased 3.6 percent from the previous week. The seasonally adjusted Purchase Index decreased 1.7 percent from one week earlier. The unadjusted Purchase Index increased 17.1 percent compared with the previous week and was 4.3 percent lower than the same week one year ago.