MBS MID-DAY: Steady In Stronger Territory Following ISM

MBS Pricing Snapshot

MBS and Treasuries improved markedly following the significantly weaker-than-expected ISM Manufacturing data which showed the first contraction (reading below 50) since July 2009. 10yr Yields fell from just under 1.63 to just under 1.59, and having hesitated at the lows, are now moving into the 1.57's.

Stocks are not mirroring the move in Treasuries as S&P's have not yet returning to their immediate post-ISM lows (let alone broken lower as Treasuries have). Fannie 3.0 MBS resemble the Treasury bounce, still in fairly strong territory and close to breaking into new highs, whereas Fannie 3.5's resemble to stock bounce in that they have yet to return to their immediate post-ISM extremes and are exhibiting a bit of hesitation in doing so.

Positive reprice potential here would depend on the timing of your initial rate sheet.

The U.S. Census Bureau of the Department of Commerce announced today that construction spending during May 2012 was estimated at a seasonally adjusted annual rate of $830.0 billion, 0.9 percent (±1.5%)* above the revised April estimate of $822.5 billion. The May figure is 7.0 percent (±2.0%) above the May 2011 estimate of $775.8 billion.

During the first 5 months of this year, construction spending amounted to $310.5 billion, 9.4 percent (±1.6%) above the $283.8 billion for the same period in 2011.

PRIVATE CONSTRUCTION

Spending on private construction was at a seasonally adjusted annual rate of $560.4 billion, 1.6 percent (±1.6%)* above the revised April estimate of $551.8 billion. Residential construction was at a seasonally adjusted annual rate of $261.3 billion in May, 3.0 percent (±1.3%) above the revised April estimate of $253.8 billion. Nonresidential construction was at a seasonally adjusted annual rate of $299.1 billion in May, 0.4 percent (±1.6%)* above the revised April estimate of $298.0 billion.

PUBLIC CONSTRUCTION

In May, the estimated seasonally adjusted annual rate of public construction spending was $269.6 billion, 0.4 percent (±2.1%)* below the revised April estimate of $270.7 billion. Educational construction was at a seasonally adjusted annual rate of $65.0 billion, 3.0 percent (±3.8%)* below the revised April estimate of $67.0 billion. Highway construction was at a seasonally adjusted annual rate of $78.0 billion, 0.5 percent (±6.3%)* below the revised April estimate of $78.4 billion.

- Headline PMI Falls Below 50 (1st since 2009)
- Prices Paid plummet to 37.0 from 47.5
- New Orders 47.8 vs 60.1 last time
- Employment Component down moderately 56.6 vs 56.9
- All in all, a BIG downside surprise for the report and for the economic outlook.

From the ISM:

Economic activity in the manufacturing sector contracted in June for the first time since July 2009; however, the overall economy grew for the 37th consecutive month, say the nation's supply executives in the latest Manufacturing ISM Report On Business®.

The PMI registered 49.7 percent, a decrease of 3.8 percentage points from May's reading of 53.5 percent, indicating contraction in the manufacturing sector for the first time since July 2009, when the PMI registered 49.2 percent. The New Orders Index dropped 12.3 percentage points in June, registering 47.8 percent and indicating contraction in new orders for the first time since April 2009, when the New Orders Index registered 46.8 percent.

The Production Index registered 51 percent, and the Employment Index registered 56.6 percent. The Prices Index for raw materials decreased significantly for the second consecutive month, registering 37 percent, which is 10.5 percentage points lower than the 47.5 percent reported in May. Comments from the panel range from continued optimism to concern that demand may be softening due to uncertainties in the economies in Europe and China.

The Mortgage Bankers Association is pleased to announce that David H. Stevens has agreed to stay on as President and CEO. Recently, Stevens indicated he planned to leave the association in order to accept a position at SunTrust Mortgage, a long-standing active MBA member.

Over the past several weeks, MBA’s leadership, members and staff impressed upon Dave the important role he was playing for the industry and his unique qualifications to lead the association. "The importance and significance of MBA's voice during this critical time coupled with Dave's experience and talents encouraged us to do all we could to retain him,” said MBA Chairman Michael W. Young.

"The past few weeks have been extremely difficult for me personally and professionally. After serious thought and consideration, I simply cannot leave the MBA at such a critical time for the industry and the association." Stevens said. "Frankly, at the end of the day, stepping away now when so much progress is being made and so much still left to be done, did not feel right."

"The officers and management of MBA could not be more pleased and supportive of Dave's decision to stay." said MBA Chairman-Elect, Debra W. Still. "Dave’s leadership and influence over the past year have been invaluable to our members and our industry. We are all looking forward to continuing the good work and forward momentum of the MBA with Dave at the helm.”

“Going through this experience left me encouraged by the tremendous opportunity that lies within our industry and reinforced the essential component mortgage finance will continue to play in helping our nation’s economy recover.” Stevens noted.

- Slower growth of output, new orders and employment reported in June

- First fall in input prices since June 2009

- Producers of investment goods report weakest improvement in business conditions

At 52.5, lower than the earlier flash estimate of 52.9 and down from 54.0 in May, the final Markit U.S. Manufacturing Purchasing Managers’ Index™ (PMI™)1 signalled the weakest improvement in business conditions in 18 months during June. PMI index readings above 50.0 signal an increase or improvement on the prior month, while readings below 50.0 indicate a decrease.

As the domestic session gets under way this morning, both MBS and Treasuries are in slightly stronger territory, bringing them in line with Friday morning's levels. The narrow, sideways range denoted by 10yr yields between 1.68 and 1.56 continued to easily contain market movements in the overnight session.

Friday saw the upper limits of that range tested as the EU summit produced at least something resembling stimulus, but the range held. The suggested technical 'bounce' is being helped along by overnight news that Finland and Holland will seek to block the stimulus efforts announced Friday. Even if it's not yet clear how successful they could be in such an endeavor, it's a moderately bond-market-friendly development. Falling into that same category is the higher Euro-zone unemployment reported overnight as well as weaker manufacturing data out of China.

10yr yields hit 1.655 just before the open and are currently down to 1.638. Fannie 3.5 MBS are 3 ticks higher at 105-07 and 3.0s are 2 ticks higher at 102-20. Stock futures are currently almost exactly in line with Friday's 4pm levels in terms of S&P futures.

This morning brings the Markit Manufacturing PMI at 5:58 and ISM PMI an hour and 2 minutes later.