MBS MID-DAY: Europe Leads Risk Rally, MBS Standing Ground

MBS Pricing Snapshot

- Factory Orders +3.0 vs +2.9 Consensus
- January revised from -2.0 to -1.0
- Excluding Defense Sector +2.4 vs +1.0 in Jan
- February Durable Goods revised to 5.6 from 5.7
- Excluding Transportation +0.3 vs +2.0
Market Reaction: stocks are slightly higher and bond markets weakened initially, but are now back at pre-data levels.

New orders for manufactured goods in February, up two of the last three months, increased $14.5 billion or 3.0 percent to $492.0 billion, the U.S. Census Bureau reported today. This was at the highest level since the series was first published on a NAICS basis in 1992 and followed a 1.0 percent January decrease. Excluding transportation, new orders increased 0.3 percent.

Shipments, up five of the last six months, increased $4.3 billion or 0.9 percent to $489.3 billion. This was at the highest level since the series was first published on a NAICS basis and followed a 0.4 percent January increase.

Unfilled orders, up five of the last six months, increased $9.3 billion or 0.9 percent to $999.7 billion. This followed a slight January decrease. The unfilled orders-to-shipments ratio was 6.28, up from 6.25 in January.

Inventories, up three consecutive months, increased $1.1 billion or 0.2 percent to $620.0 billion. This was at the highest level since the series was first published on a NAICS basis and followed a 0.6 percent January increase. The inventories-to-shipments ratio was 1.27, down from 1.28 in January.

Europe doesn't mess around when it comes to taking time off surrounding the Easter Holiday. Until about 3am this morning, they've been out since Thursday. As European markets got back to business, it's been largely a risk-on affair, but nothing too lop-sided (risk-on = favoring riskier assets like stocks and/or selling risk-free assets like German / US sovereign debt, thus raising rates).

The healthy dose of European data was fairly balanced though Italian Unemployment improved slightly and German inflation remained in check. And it's those two countries leading the gentle charge slightly weaker overnight. 10yr Bunds pushed higher, moving away from 8 month lows at the end of last week. Italian credit spreads (a measure of perceived risk in Italy) fell after topping out at 5 month highs late last week.

Considering all of the above, it's not unlikely that there was a good measure of defensiveness heading into the 4-day weekend which is now being unwound. This could continue to pose challenges for domestic bond markets to whatever extent it continues. US 10's followed Bunds overnight, moving from mid 1.82's at the European open to 1.86 currently. To make matters worse, from a technical standpoint, yesterday looks like another bounce on a floor of resistance at mid 1.83's.

MBS opened a few ticks weaker, but thus far, aren't as bad off as Treasuries. Fannie 3.0's are currently down 3 ticks at 103-08, similarly capping out at recent resistance levels of 103-10. There's no massively significant domestic economic data today, but February Factory Orders hit at 10am. Between now and then (and for a few hours after as well) European markets continue to be the driving force. As long as Bunds are able to hold under their 1.31+ ceiling, we should be able to hold our ground reasonably well, but are certainly playing defense so far this morning.