MBS MID-DAY: Best Levels Since Early March Amid Low Volume

MBS Pricing Snapshot

MBS had slowly but surely ticked back up to positive territory just before the morning's biggest piece of data, ISM Manufacturing at 10am. After a weaker-than-expected print, both MBS and Treasuries continued through to stronger levels, but both have met with some resistance at levels which are not unfamiliar.

10yr Treasuries put in their bounce right at 1.84. While this isn't the lowest yield seen in the past week, it's just another variant of the super important, super long term pivot point that can be seen as anything from 1.83 to 1.845.

MBS hit today's highs at a similarly significant level of 103-09 in Fannie 3.0's which have been the absolute highs since March 6th, also showing up on the 19th and the 27th. This doesn't necessarily mean that we're doomed to trade underneath 103-09, but simply that the resistance is more than serendipitous and any break higher is a net positive from a longer term technical standpoint in addition to whatever it does for intraday positive reprice risk.

- Construction Spending +1.2 vs +1.0 consensus
- Private spending +1.3, public +0.9
- Private Residential highest since Nov 2008

The U.S. Census Bureau of the Department of Commerce announced today that construction spending during February 2013 was estimated at a seasonally adjusted annual rate of $885.1 billion, 1.2 percent (±1.5%)* above the revised January estimate of $874.8 billion. The February figure is 7.9 percent(±2.1%) above the February 2012 estimate of $820.7 billion. During the first 2 months of this year, construction spending amounted to $120.1 billion, 6.6 percent (±1.8%) above the $112.6 billion for the same period in 2012.

Spending on private construction was at a seasonally adjusted annual rate of $613.0 billion, 1.3 percent (±1.2%) above the revised January estimate of $605.2 billion. Residential construction was at a seasonally adjusted annual rate of $303.4 billion in February, 2.2 percent(±1.3%) above the revised January estimate of $296.9 billion. Nonresidential construction was at a seasonally adjusted annual rate of $309.6 billion in February, 0.4 percent(±1.2%)* above the revised January estimate of $308.3 billion.

In February, the estimated seasonally adjusted annual rate of public construction spending was $272.1 billion, 0.9 percent (±2.5%)* above the revised January estimate of $269.6 billion. Educational construction was at a seasonally adjusted annual rate of $63.2 billion, 0.3 percent (±4.8%)* below the revised January estimate of $63.3 billion. Highway construction was at a seasonally adjusted annual rate of $81.4 billion, 3.4 percent(±7.9%)* above the revised January estimate of $78.7 billion.

- ISM Manufacturing PMI 51.3 vs 54.2 Consensus
- New Orders 51.4 vs 57.8 Previously
- Employment 54.2 vs 52.6 Previously
- New Orders/Manufacturing lowest since Dec
- Employment highest since June

Market Reaction: Strong response for bond markets, weakness in equities.

From the ISM: "The PMI™ registered 51.3 percent, a decrease of 2.9 percentage points from February's reading of 54.2 percent, indicating expansion in manufacturing for the fourth consecutive month, but at a slower rate. Both the New Orders and Production Indexes reflected growth in March compared to February, albeit at slower rates, registering 51.4 and 52.2 percent, respectively. The Employment Index registered 54.2, an increase of 1.6 percentage points compared to February's reading of 52.6 percent. The Prices Index decreased 7 percentage points to 54.5, and the list of commodities up in price reflected far fewer items than in February. In addition, the Backlog of Orders, Exports and Imports Indexes all grew in March."

- PMI 54.6 vs 54.9 preliminary reading
- Although March's "final" PMI came in slightly lower than the "flash" (preliminary reading), it's not having a marked impact on trading levels so far. Some of the ostensible reaction in bond markets was purely tradeflow related with most market participants waiting on the ISM version of the same data. That said, if there has been any reaction, it's been positive for Treasuries/MBS and slightly negative for equities markets, helping continue a bounce back from weaker morning levels.

The final Markit U.S. Manufacturing Purchasing Managers’ Index posted 54.6 in March, signalling a further improvement in overall U.S. manufacturing business conditions. The PMI was up from February’s 54.3 but down from the earlier flash estimate of 54.9, and consistent with a solid rate of expansion.

The PMI averaged 54.9 in Q1 2013 as a whole and, up from 52.6 in Q4 2012, indicated the strongest quarterly performance in two years.

A further strong rise in manufacturing output was recorded in March, although the rate of growth eased to a three-month low. Moreover, all three market groups saw an increase in production over the month, with manufacturers of intermediate goods (suppliers of components to other producers) reporting the strongest expansion.

With most of Europe taking the day off for the holiday, volumes were exceptionally low overnight. That left the Asian market hours as the primary source of overnight movement. 10's opened slightly higher in yield, digesting the stronger economic data from Friday (markets were closed but Consumer Sentiment and Consumer Spending printed better-than-respected results).

We've seen some mention of stronger Chinese PMI data (Korea stronger too), but aren't seeing a meaningful correlation between that data and market movement. Essentially, 10's held the Asian hours in line with their opening levels at 8pm on Sunday night. The next leg up wasn't until 6am--well after any Asian market events would be having an impact.

As such, it looks like the domestic market participants most able to fight off the allure of the snooze button were willing to run yields a bit higher heading into the 8am open. Buyers put their feet down just before 10's hit 1.89 and we've since stabilized to 1.876.

For their part, MBS are back in line with opening levels of 103-00, and just ticked up to 103-01. This is roughly 3.5 ticks off the earlier lows of the morning, but still 4 ticks down on the day (vs Friday's close).

Markit's Manufacturing PMI is coming up at 8:58 with ISM's version at 10am. Apart from waiting/reacting to headlines and tradeflows, there's not much else going on today.