MBS MID-DAY: Some Weakness Following Fed Twist Buying

MBS Pricing Snapshot

- PMI 50.4 vs 50.5 consensus, 49.9 previous
- New Orders 45.3 vs 50.6 previous
- Prices Paid 70.1 vs 50.6 previous, highest since March
- New orders lowest since June 2009
- Employment Index 55.2 vs 50.3 previous

The Chicago Purchasing Managers reported November's Chicago Business Barometer improved to 50.4. After two consecutive months in contraction, the Business Barometer was led higher by advances in Production, Employment, and Supplier Deliveries while New Orders subtracted from economic activity.

BUSINESS ACTIVITY:
• PRICES PAID: 16 month high; EMPLOYMENT continues on pace with PRODUCTION;
  
• NEW ORDERS: lowest since June 2009;
• INVENTORIES: lowest since February 2010.

Despite a gradual drift higher in equities and the Euro in the overnight session, Treasuries maintained sideways momentum, finding support at yesterday's salient intraday inflection point of 1.63. It's not that risk markets were disconnected. In fact, Treasuries did mirror and match the risk-on/risk-off movements in related markets quite well. It's just that when the Euro moved higher, Treasuries did so at slower pace.

All in all, however, the majority of the overnight session was flat and uninspired for bond markets. It wasn't for lack of data and events. Germany's lower house approved the Greek bailout and comments from ECB Pres Draghi shook things up a bit around 3am. Europe's joblessness also hit a record high. But the biggest movement in Treasuries was seen NOT on the heals of any major event or piece of data, but rather as a simple result of domestic traders firing up their screens for the day.

10yr yields had already hit their overnight lows by 8am and drifted lower heading into the Consumer Spending data. MBS opened just a tick below with yesterday's highs at 105-04. The data had a barely noticeable impact on trading levels, but if anything, was perhaps mildly positive. Fannie 3.0s are currently up 3 ticks on the day at 105-06 and 10yr yields are down 1.5 bps at 1.6045. Next data on tap is Chicago PMI at 9:45am.

(Reuters) - Euro zone joblessness has reached a new high and the poor state of the economy is reducing inflation to near two-year lows, raising the prospect of further interest cuts by the European Central Bank.

As the euro zone sinks into its second recession since 2009, the number of people out of work in the euro zone rose by 173,000 people in October to almost 19 million people unemployed, the EU's statistics office Eurostat said on Friday.

That pushed joblessness to the highest level since the euro was introduced in 1999, at 11.7 percent of the working population, illustrating the human impact of a public debt and banking crisis that has reverberated across the world.

- Spending -0.2 pct vs 0.0 consensus
- First decline in spending since May
- Income 0.0 vs +0.2 consensus, weakest since April
- "Real" Consumer Spending -0.3 pct, most since Sept 2009

Personal income increased $0.4 billion, or less than 0.1 percent, and disposable personal income (DPI) increased $0.8 billion, or less than 0.1 percent, in October, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) decreased $20.2 billion, or 0.2 percent. In September, personal income increased $47.8 billion, or 0.4 percent, DPI increased $42.1 billion, or 0.4 percent, and PCE increased $84.0 billion, or 0.8 percent, based on revised estimates.

Real disposable income decreased 0.1 percent in October, compared with an increase of less than 0.1 percent in September. Real PCE decreased 0.3 percent, in contrast to an increase of 0.4 percent.

Personal outlays -- PCE, personal interest payments, and personal current transfer payments -- decreased $18.0 billion in October, in contrast to an increase of $87.3 billion in September. PCE decreased $20.2 billion, in contrast to an increase of $84.0 billion.