MBS MID-DAY: Already Down On Draghi and Data, Slightly Weaker During Fed Buyback

MBS Pricing Snapshot

Just a quick update on the ongoing deterioration in bond markets... All we have going on at the moment is the scheduled Fed buyback in the 25-30yr range and roughly 15 minutes in, 10yr yields are at new highs for the day and MBS are aggressively testing low-range support at 103-10, breaking through to 103-09 on a few brief occasions. To whatever extent a break below 103-10 materializes, the next major pivot is at 103-00. The closer we are to 103-00 today, the greater the negative reprice risk. The closer we are to 103-10, the lighter the reprice risk. Over 103-10 is likely "safe," at least as far as MBS-related rate sheet pricing is concerned (just saying... MBS not the only determining factor in rate sheet changes).

- Purchasing Managers Index: 53.7 vs 52.5 consensus
- Activity Index: 55.6 vs 56.3 consensus
- New Orders fell from 54.3 to 53.7
- Employment rises from 49.3 to 53.8, highest since April

Economic activity in the non-manufacturing sector grew in August for the 32nd consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business®.

The report was issued today by Anthony Nieves, C.P.M., CFPM, chair of the Institute for Supply Management™ Non-Manufacturing Business Survey Committee. "The NMI™ registered 53.7 percent in August, 1.1 percentage points higher than the 52.6 percent registered in July. This indicates continued growth this month at a slighter faster rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 55.6 percent, which is 1.6 percentage points lower than the 57.2 percent reported in July, reflecting growth for the 37th consecutive month. The New Orders Index decreased by 0.6 percentage point to 53.7 percent. The Employment Index increased by 4.5 percentage points to 53.8 percent, indicating growth in employment after one month of contraction. The Prices Index increased 9.4 percentage points to 64.3 percent, indicating substantially higher month-over-month prices when compared to July. According to the NMI™, 10 non-manufacturing industries reported growth in August. Respondents' comments continue to be mixed, and for the most part reflect uncertainty about business conditions and the economy."

Lots for MBS and Treasuries to digest this morning with stronger-than-expected ADP payrolls, Draghi generally delivering on ECB expectations, and a relatively upbeat Merkel/Rajoy meeting. Various combinations of all of the above have led Treasury yields to their highest levels of the morning and MBS to their lowest prices, but the clearest pop in volume and directionality was seen at the ADP report at 8:15am.

Since then, markets have been ping-ponging off ECB press conference headlines and to a lesser extent, Merkel/Rajoy headlines. It's a bit of a mess, actually, and watching flows, we're left with the sense that there's "too much" going on. Despite the big volume pop on ADP, there are other moves--only slightly smaller--that correlate with one of several pieces of news or data hitting at the same time.

US 10yr yields and German Bunds are joined firmly at the hip since 8:15am. Both have risen about 5bps from their flatter trading earlier this morning, with US 10's at 1.654. Fannie 3.0 MBS are down 12 ticks to 103-11.

There are significant supportive pivot points in slightly weaker territory, around 1.69 for 10yr yields and 103-00 for MBS. It doesn't look like we're headed there for now though, as MBS are clearly favoring the 103-10 pivot so far this morning. Apart from reacting to the impending cash stock market open, the next major digestible data for bond markets hits at 10am with ISM Non-Manufacturing.

- Claims 365k vs 370k consensus

In the week ending September 1, the advance figure for seasonally adjusted initial claims was 365,000, a decrease of 12,000 from the previous week's revised figure of 377,000. The 4-week moving average was 371,250, an increase of 250 from the previous week's revised average of 371,000.

The advance seasonally adjusted insured unemployment rate was 2.6 percent for the week ending August 25, unchanged from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending August 25 was 3,322,000, a decrease of 6,000 from the preceding week's revised level of 3,328,000. The 4-week moving average was 3,320,750, a decrease of 3,500 from the preceding week's revised average of 3,324,250.

Private-sector employment increased by 201,000 from July to August on a seasonally adjusted basis, according to the latest ADP National Employment Report released today. The ADP National Employment Report, created by Automatic Data Processing, Inc. (ADP ), in partnership with Macroeconomic Advisers, LLC, is derived from actual payroll data and measures the change in total nonfarm private employment each month. The estimated gain from June to July was revised up from the initial estimate of 163,000 to 173,000.