MBS MID-DAY: Gradual Move Weaker Throughout Morning

MBS Pricing Snapshot

The NMI™ registered 55.1 percent in September, 1.4 percentage points higher than the 53.7 percent registered in August. This indicates continued growth this month at a faster rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 59.9 percent, which is 4.3 percentage points higher than the 55.6 percent reported in August, reflecting growth for the 38th consecutive month. The New Orders Index increased by 4 percentage points to 57.7 percent. The Employment Index decreased by 2.7 percentage points to 51.1 percent, indicating growth in employment for the second consecutive month but at a slower rate. The Prices Index increased 3.8 percentage points to 68.1 percent, indicating higher month-over-month prices when compared to August. According to the NMI™, 12 non-manufacturing industries reported growth in September. Respondents' comments continue to be mixed; however, the majority indicate a slightly more positive perspective on current business conditions.

First of all, it should be noted that the broader themes in play since the middle of last week remain intact. Essentially we've had Treasuries locked in a narrow sideways range between 1.65 and 1.61. MBS have also held a narrow range, but it's tilted positively, an ongoing byproduct of QE3.

If you want to stop reading right there, you wouldn't be missing much as we now dig into the nitty gritty. The bigger picture is simply about these narrow grinds into NFP Friday, as we noted in The Day Ahead.

The overnight session saw bond markets add to yesterday afternoon's improvements. Markit reported a weaker Chinese services PMI which weighed on Asian stocks to some extent (though China and Korea remain out on holiday).

Things began to turn around at the onset of the European session. Spain's Rajoy said the country won't need a "full" bailout and the Finish Finance Minister echoed that sentiment later in the session. Slightly weaker German services PMI helped keep things contained into the domestic hours.

Early New York trading coped with a better-than-expected ADP Private Payrolls report, putting some slightly pressure back on bond markets, but mostly endured as within the scope of error that's inconsequential to Friday's NFP. Adding to the bearish case for bond markets in the morning hours has been a report that some ECB members are discussing possible repayment extensions for Greece.

From there, both Treasuries and MBS have hit their weakest levels of the session, though both remain well above yesterday's weakest prices (or below yesterday's highest yields). MBS are 3 ticks down so far at 105-27 after being as high as 106-00 earlier in the session (Fannie 3.0s). 10yr yields are 1 bp off 5pm levels at 1.63 as the domestic stock session gets underway near yesterday's highs.

Next up is ISM's NON-Manufacturing Index. The main "business activity" and PMI indexes are important, but we'll also have an eye on the Employment component to see if it also suggests a slightly more bullish NFP Friday. It's easy to dismiss a 20k-ish beat on ADP, but if ISM makes the same case (as it did on Monday as well), then we could see more of a reaction.

- ADP Payrolls +162k vs +143k Consensus
- August report revised down to 189k from 201k

Employment in the U.S. nonfarm private business sector increased by 162,000 from August to September, on a seasonally adjusted basis. The estimated gains in previous months were revised lower: The July increase was reduced by 17,000 to an increase of 156,000, while the August increase was reduced by 12,000 to an increase of 189,000.

Employment in the private, service-providing sector expanded 144,000 in September, down from 175,000 in August. Employment in the private, goods-producing sector added 18,000 jobs in September. Manufacturing employment rose 4,000, while construction employment rose 10,000, the strongest since March when mild winter weather was boosting construction activity. The financial services sector added 7,000 jobs in September, marking the fourteenth consecutive monthly gain.

Employment on large payrolls—those with 500 or more workers—increased 17,000 and employment on medium payrolls—those with 50 to 499 workers—rose 64,000 in September. Employment on small payrolls—those with up to 49 workers—rose 81,000 that same period. Of the 64,000 jobs created on medium-sized payrolls, 10,000 jobs were created by the goods-producing sector and 54,000 jobs were created by the service-providing sector.