MBS MID-DAY: Lack Of Italian Headlines Leaves Bond Markets Flat

MBS Pricing Snapshot

- PMI 52.4 vs 56.5 Consensus
- New Orders 53.0 vs 60.2 Previously
- Production Index Lowest Since Sept 2009

The Chicago Purchasing Managers reported the Chicago Business Barometer veered downward, falling 4.4 points to 52.4 in March.

After a strong start to the year, the Business Barometer was knocked back by steep declines in New Orders, Production, and another disappointing dip in Order Backlogs.

All other Business Activity measures also declined in March, the exception being supplier lead times, which lengthened considerably.

NEW ORDERS: fell sharply after three months of solid gains
PRODUCTION: lowest since Sep 2009
ORDER BACKLOGS: ninth month of contraction in the last year
INVENTORIES: fourth contraction in the last six months
SUPPLIER DELIVERIES: longest in 15 months.

As far as German Bunds are concerned, Eurozone risk continues to build as Bund yields continue to trend lower. The overnight session initially looked like Treasuries would follow. Volatility in Euros saw a sharp drop heading into the 5am EST hour, but they hit the wall right at yesterday morning's lows after Cypriot banks reopened and didn't immediately fall victim to rioting and pillaging.

The looming potential for Italian headlines had also been weighing on markets and Italian spreads improved just slightly after hitting their absolute widest post-election levels. Bersani says he will report to Italian President Napolitano on efforts to form a government. We're not sure what to expect, or when to expect it on that front, but such news "reserves the right" to be important.

After the Cypriot bank reopening and again after the somewhat optimistic Bersani headlines--very probably compounded by early domestic tradeflows--Euros and Italian spreads improved into the US trading hours. Between the earlier "wall" that was hit and those improvements, we have our range for the morning so far. Slightly weaker domestic economic data helped curb rising Treasury yields and gave a lift to MBS that opened in line with yesterday's lows.

We now sit just a tick weaker vs yesterday's close at 103-04 in Fannie 3.0s. Treasuries are up about 1.5bps at 1.859 after hitting 1.87 again. That's the same supportive ceiling yesterday morning... (sorta exciting? at least if it holds into the extended weekend). We'll be watching 1.87 as a technical line in the sand then, and of course staying tuned for any Italian headlines.

- GDP +0.4 pct vs +0.5 pct consensus
- Consumer Spending +1.8 vs +2.1 previously
- Deflator +1.0 pct vs +0.9 pct consensus

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 0.4 percent in the fourth quarter of 2012 (that is, from the third quarter to the fourth quarter), according to the "third" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 3.1 percent.

The GDP estimate released today is based on more complete source data than were available for the "second" estimate issued last month. In the second estimate, real GDP increased 0.1 percent. While nonresidential fixed investment is higher than previously estimated, the revision to GDP has not changed the general picture of the economy.

The increase in real GDP in the fourth quarter primarily reflected positive contributions from personal consumption expenditures (PCE), nonresidential fixed investment, and residential fixed investment that were partly offset by negative contributions from private inventory investment, federal government spending, exports, and state and local government spending. Imports, which are a subtraction in the calculation of GDP, decreased.

The deceleration in real GDP in the fourth quarter primarily reflected downturns in private inventory investment, in federal government spending, in exports, and in state and local government spending that were partly offset by an upturn in nonresidential fixed investment, a larger decrease in imports, and an acceleration in PCE.

Motor vehicle output added 0.18 percentage point to the fourth-quarter change in real GDP after subtracting 0.25 percentage point from the third-quarter change. Final sales of computers added 0.10 percentage point to the fourth-quarter change in real GDP after adding 0.11 percentage point to the third-quarter change.

- 357k vs 340 consensus
- Last week revised to 341k from 336k
- Continued Claims 3.050 mln vs 3.043 mln consensus

In the week ending March 16, the advance figure for seasonally adjusted initial claims was 336,000, an increase of 2,000 from the previous week's revised figure of 334,000. The 4-week moving average was 339,750, a decrease of 7,500 from the previous week's revised average of 347,250.

The advance seasonally adjusted insured unemployment rate was 2.4 percent for the week ending March 9, unchanged from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending March 9 was 3,053,000, an increase of 5,000 from the preceding week's revised level of 3,048,000. The 4-week moving average was 3,076,250, a decrease of 28,000 from the preceding week's revised average of 3,104,250.