MBS MID-DAY: Holding Gains After Morning Volatility; Cautiously Following Stocks

MBS Pricing Snapshot

Although it's not a timely market mover, the Employment Trends Index has proven to be a good forecaster of unemployment over the long run. Today's reading suggests the downward trajectory of the unemployment rate may level off in the coming months.

From The Conference Board: The Conference Board Employment Trends Index™ (ETI) decreased again in September, following a downward revision in August. The index now stands at 107.86, down from the revised figure of 108.23 in August. The September figure is 5.4 percent higher than a year ago.

“In September, the Employment Trends Index declined for the third time in four months, suggesting that employment growth will weaken further in the fourth quarter,” said Gad Levanon, Director of Macroeconomic Research at The Conference Board. “The U.S. economy entered a soft patch in the spring and the result has been lackluster job growth, which is likely to continue through the first half of 2013.”

September’s decline in the ETI was driven by negative contributions from five of the eight components. The weakening indicators – beginning with the largest negative contributor – were Ratio of Involuntarily Part-time to All Part-time Workers, Percentage of Firms With Positions Not Able to Fill Right Now, Initial Claims for Unemployment Insurance, Number of Temporary Employees and Job Openings.

The Employment Trends Index aggregates eight labor-market indicators, each of which has proven accurate in its own area. Aggregating individual indicators into a composite index filters out “noise” to show underlying trends more clearly.

The eight labor-market indicators aggregated into the Employment Trends Index include:

• Percentage of Respondents Who Say They Find “Jobs Hard to Get” (Consumer Confidence Survey®)
• Initial Claims for Unemployment Insurance (U.S. Department of Labor)
• Percentage of Firms With Positions Not Able to Fill Right Now (© National Federation of Independent Business Research Foundation)
• Number of Employees Hired by the Temporary-Help Industry (U.S. Bureau of Labor Statistics)
• Ratio of Involuntarily Part-time to All Part-time Workers (BLS)
• Job Openings (BLS)
• Industrial Production (Federal Reserve Board)
• Real Manufacturing and Trade Sales (U.S. Bureau of Economic Analysis)

A tertiary market mover at best, this morning's IDB/TIPP confidence numbers only make the cut insofar as they suggest that Friday's consensus for weaker Consumer Sentiment may be setting us up for an upside surprise. IBD/TIPP claims 80% reliability in predicting monthly changes in the bigger sentiment reports

"The IBD/TIPP Economic Optimism Index improved by 2.2 points, or 4.2%, in October posting 54 vs. 51.8 in September. The index is 6.4 points above its 12-month average of 47.6, 9.6 points above its reading of 44.4 in December 2007 when the economy entered into the recession, and 4.1 points above its all-time average of 49.9."

Note: Index readings above 50 indicate optimism; below 50 indicate pessimism.

The overnight session started out sideways through Asian trading hours and rallied moderately during Draghi's press conference. German Bunds led the move lower in yield, but bounced just before 4am with US Treasuries following. A growing bid for US Stock futures added to the "risk-on" trade as earning season kicks off today.

10yr yields made it as low as 1.685, but have since risen into the 1.72's. MBS opened in slightly stronger territory and despite losing a few ticks after jumping on board the morning's gentle selling trend, are still up 6 ticks in Fannie 3.0s at 105-08.

There is no significant scheduled economic data today and most of the news thus far has consisted of minor headlines out of Europe. One of the more interesting stories concerns the IMF's warning that the current risks of an economic downturn are "more elevated than in April 2012 or Sept 2011" (-The Guardian).

The 3yr Treasury Auction at 1pm, while certainly not as important a market mover as tomorrow's 10yr or Thursday's 30yr, may not even register a perceptible response. With earnings season kicking off for stocks, the lack of tradable data leaves an increased possibility for bond markets to mirror and match stock market movement.