MBS MID-DAY: Slow And Steady In Positive Territory

MBS Pricing Snapshot

- Overall index 42 vs 45 consensus, 44 in March
- Current SFR Sales 45 vs 47 in March
- Prospective Buyer Index 30 vs 34 in March
- 6-month outlook 53 vs 50 in March

Facing increasing costs for building materials and rising concerns about the supply of developed lots and labor, builders registered less confidence in the market for newly built, single-family homes in April, with a two-point drop to 42 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today.

“Many builders are expressing frustration over being unable to respond to the rising demand for new homes due to difficulties in obtaining construction credit, overly restrictive mortgage lending rules and construction costs that are increasing at a faster pace than appraised values,” said Rick Judson, National Association of Home Builders (NAHB) Chairman and a home builder from Charlotte, N.C. “While sales conditions are generally improving, these challenges are holding back new building and job creation.”

“Supply chains for building materials, developed lots and skilled workers will take some time to re-establish themselves following the recession, and in the meantime builders are feeling squeezed by higher costs and limited availability issues,” explained NAHB Chief Economist David Crowe. “That said, builders’ outlook for the next six months has improved due to the low inventory of for-sale homes, rock bottom mortgage rates and rising consumer confidence.”

US Treasuries began the overnight session in slightly weaker territory, but gave up less than 2bps before the European session facilitated a bounce. Early domestic trading added to the rally in premarket hours, helping 10yr yields ratchet 3bps lower in the two hours leading up to 8am.

At that point, both MBS and Treasuries were in line with their technical resistance levels mentioned in The Day Ahead, and have essentially been either sideways or weaker ever since. For MBS, that's kept Fannie 3.0s very close to the long term resistance zone starting at 104-07 (stretching up to 104-10).

None of the morning's domestic data has had much of an impact so far, despite the fact that the Empire State Manufacturing Survey was notably weaker than expected. This may be partially offset by the improvement in the Employment component of the data.

The next data arrives at 10am with the NAHB's Housing Market Index. Between now and then, bond markets looks like they're in a stand-off between Friday's closing levels and the long term resistance mentioned above. In that regard, MBS are much closer than Treasuries (10's are at 1.714 currently, with the resistance zone beginning just under 1.70, while Fannie 3.0 are right on their long-term resistance at 104-07). S&P futures are down about 8 points ahead of the US equities open.

- Headline Index 3.05 vs 7.0 consensus
- Employment Index 6.82 vs 3.23 previously
- New Orders 2.2 vs 8.18 previously

The April 2013 Empire State Manufacturing Survey indicates that conditions for New York manufacturers improved slightly. The general business conditions index fell six points, but at 3.1, remained positive for a third consecutive month. Similarly, the new orders index was lower than last month but still positive, dipping six points to 2.2, and the shipments index fell to 0.8. The indexes for both prices paid and prices received inched higher—a sign that the pace of input and selling price increases had picked up over the month. Employment indexes climbed, showing a modest increase in both employment levels and hours worked. Indexes for the six-month outlook pointed to a moderate degree of optimism about future conditions.

In a series of supplementary questions—previously posed in surveys conducted in April 2012 and earlier—respondents were asked how much difficulty they had experienced finding workers proficient in mathematical, computer, interpersonal, and other workplace skills. As in the earlier surveys, the most widespread difficulties related to the search for workers with advanced computer skills. In addition, a skill set that has reportedly grown harder to find is punctuality and reliability. Responses to other supplemental questions indicated that firms expected wages to rise by roughly 2½ percent, on average, over the next twelve months, and that, for nearly a third of firms, retaining skilled workers would become increasingly difficult in the year ahead.