MBS MID-DAY: Shaking Off Morning Weakness Before Breaking Ranges

MBS Pricing Snapshot

- Factory Orders -2.0 vs -2.2 Consensus
- Excluding Transportation = +1.3
- Market Reaction: no immediate reaction to the data itself, but improving just slightly as European markets weaken (lower Bund yields, falling Euro).

New orders for manufactured goods in January, down two of the last three months, decreased $9.6 billion or 2.0 percent to $472.9 billion, the U.S. Census Bureau reported today. This followed a 1.3 percent December increase. Excluding transportation, new orders increased 1.3 percent.

Shipments, down two consecutive months, decreased $1.0 billion or 0.2 percent to $481.8 billion. This followed a slight December decrease.

Unfilled orders, down following four consecutive monthly increases, decreased $2.0 billion or 0.2 percent to $988.9 billion. This followed a 0.7 percent December increase. The unfilled orders-to-shipments ratio was 6.27, up from 6.15 in December.

Inventories, up two consecutive months, increased $3.2 billion or 0.5 percent to $618.4 billion. This followed a slight December increase. The inventories- to-shipments ratio was 1.28, up from 1.27 in December.

You've heard of the "Stock Lever?" Now it's time to dust off the "Italy Lever." This is very much not a new phenomenon, but for the past week particularly, domestic bond markets have based more of their overnight movement on Italian credit spreads than anything else.

Today's overnight session was a carbon copy of yesterday's in many ways. US Treasuries were virtually flat during Asian hours and quickly began giving up ground as European markets opened up and Italian spreads started falling. Since yesterday morning, the gap between Italian and German 10yr debt has narrowed by 37 bps, accounting for more than half of the post-election spike. Lo and behold, US 10yr Treasuries have given back just over half of their post-election gains as well!

Treasuries found inspiration of their own after this morning's stronger-than-expected ADP Employment figures. 10's were already higher ahead of the report, but ratcheted another few bps higher to the mid 1.94's, essentially right on the upper limit of the early January range that we guessed might serve as a good impromptu "post-Italy/pre-NFP" range. Any higher than 1.95 today though, and that would start to look less like the case.

For their part, MBS opened about 4 ticks weaker and gave up another 3 following ADP, putting in lows at 103-06 in Fannie 3.0s. We're currently 1 tick off the lows at 103-06 (net -0-06 on the day). 10yr yields are up 3.6bps at 1.934 and S&P futures are up 7 points at 1544. The next and only remaining piece of scheduled domestic data today is Factory Orders (including Durable Goods revisions) at 10am.

- ADP Private Payrolls at 198k vs 170k Consensus
- January Payrolls revised from 192k to 215k
- 198k payrolls is highest initial print since February 2012
- Market Reaction: 2 ticks lower in Fannie 3.0s, 1.5bps higher in 10yr Treasuries as of 8:21am

Private sector employment increased by 198,000 jobs from January to February, according to the February ADP National Employment Report®, which is produced by ADP®, a leading provider of human capital management solutions, in collaboration with Moody’s Analytics. The report, which is derived from ADP’s actual payroll data, measures the change in total nonfarm private employment each month on a seasonally-adjusted basis. The January 2013 report, which reported job gains of 192,000, was revised upward by 23,000 to 215,000 jobs.