MBS MID-DAY: After Merkel-Speak Soothes, Draghi Speaks Sooth

MBS Pricing Snapshot

It was "risk on" overnight as Treasuries followed German Bunds and global equities moderately higher in the overnight session. But the move was fairly tame into NY hours, looking more like markets were simply taking a quick break from their recently preferred 'risk off' trading habits.

Then around 8:15am, the risk-positive momentum (bad for bonds/MBS) got it's biggest and fastest push on comments from Germany's Merkel that she is determined to see Greece stay in the Euro-zone and more importantly/surprisingly, that Germany is open to Greece pursuing additional stimulus. This is clearly the "big deal" of the morning and overnight events (watch the CNBC interview and analysis HERE).

Stock prices and bond yields moved higher at their quickest pace of the morning and in the highest volume, by far. That said, bond market weakness was well-contained with 10yr yields holding under a ceiling at 1.817 and Fannie 3.5 MBS finding support at 104-03. As expected and discussed in The Day Ahead, the morning's domestic economic data was a non-event as markets didn't noticeably trade Housing Starts or Industrial Production numbers.

What we're left with is still a range-bound trading pattern, in heavy volume, dominated by tradeflows ("positional adjustments" aka, profit-taking, short covering, new shorts, new longs, etc...) and technical levels. We'll go with the aforementioned 1.817 as the first technical line in the sand, having bumped it twice thus far, and in high volume. Fannie 3.5 MBS have a pivot at 104-05 and another, clearly, at 104-03.

Anything better than those defensive pivots is just gravy at this point considering we essentially opened in the weakest territory. The next scheduled market-mover is the release of April 25th's FOMC Meeting Minutes at 2pm.

* Output +1.1 pct vs +0.6 pct consensus
* Capacity Utilization 79.2 vs 79.0
* Industrial Production largest rise since Dec 2010
* Cap Use highest since April 08

Industrial production increased 1.1 percent in April. Output is now reported to have fallen 0.6 percent in March and to have moved up 0.4 percent in February; previously, industrial production was estimated to have been unchanged in both months. Manufacturing output increased 0.6 percent in April after having decreased 0.5 percent in March. Excluding motor vehicles and parts, which increased nearly 4 percent, manufacturing output moved up 0.3 percent, and output for all but a few major industries increased. Production at mines rose 1.6 percent, and the output of utilities gained 4.5 percent after unseasonably warm weather in the first quarter held down demand for heating. At 97.4 percent of its 2007 average, total industrial production for April was 5.2 percent above its year-earlier level. The rate of capacity utilization for total industry moved up to 79.2 percent, a rate 3.1 percentage points above its level from a year earlier but 1.1 percentage points below its long-run (1972--2011) average.

* 717k Annual Rate vs 680k consensus
* Permits 715k Annual Rate vs 730k consensus

The U.S. Census Bureau and the Department of Housing and Urban Development jointly announced the following new residential construction statistics for April 2012:

Privately-owned housing units authorized by building permits in April were at a seasonally adjusted annual rate of 715,000. This is 7.0 percent (±1.0%) below the revised March rate of 769,000, but is 23.7 percent (±1.9%) above the revised April 2011 estimate of 578,000. Single-family authorizations in April were at a rate of 475,000; this is 1.9 percent (±1.1%) above the revised March figure of 466,000. Authorizations of units in buildings with five units or more were at a rate of 217,000 in April.

Privately-owned housing starts in April were at a seasonally adjusted annual rate of 717,000. This is 2.6 percent (±14.8%)* above the revised March estimate of 699,000 and is 29.9 percent (±15.2%) above the revised April 2011 rate of 552,000. Single-family housing starts in April were at a rate of 492,000; this is 2.3 percent (±11.9%)* above the revised March figure of 481,000. The April rate for units in buildings with five units or more was 217,000.