MBS MID-DAY: Back On Top After Opening Lower; Stock Lever Connected

MBS Pricing Snapshot

- Headline index +1.3 vs +3.0 consensus, +2.0 prev.
- 6-month outlook 19.5 vs 42.5 prev.
- New Orders -1.0 vs +0.5 prev.
- Employment -6.8 vs +2.7 prev, lowest since Nov.
- Market Reaction: moderately positive for bond markets and negative for stocks, but both have held off on any bigger moves for now (possibly starting to bounce)

Manufacturers responding to the Business Outlook Survey reported near steady business activity in April. The indicator for overall activity remained slightly positive this month, but other broad indicators were mixed. Indicators for new orders and employment were weaker this month. The survey's broad indicators of future activity suggest that firms expect continued growth, but optimism waned compared with last month.

The number of firms reporting increased activity this month (22 percent) edged out those reporting decreased activity (21 percent). The demand for manufactured goods remained weak, with the current new orders index declining from 0.5 to -1.0. The shipments index showed continued improvement, however: The index remained positive and edged six points higher, to 9.1, its highest reading in four months. Nearly 28 percent of the firms reported an increase in shipments; 19 percent reported a decrease. Firms reported a notable decrease in inventories this month: The current inventories index fell from zero to -22.2.

Labor market conditions showed continued signs of weakness, with indexes suggesting lower employment overall. The employment index decreased from 2.7 in March to -6.8 this month, its first negative reading in three months. The percentage of firms reporting employment decreases (17 percent) exceeded the percentage reporting increases (10 percent). The workweek index remained negative for the fourth consecutive month.

Overnight trading once again saw Treasuries rally mildly during Asian hours and reverse course during European hours. Volatility was slightly higher this time around as 10's moved up nearly 4bps from trough to peak, a bit more brisk than yesterday's similar move.

But in the common pattern described above, the 3rd ingredient is an 8am (or thereabouts) rally for domestic bond markets. Indeed that has been the case this morning as MBS and Treasuries were already on the move back to better levels well ahead of the Claims data. After Claims, we've held flat to slightly stronger in MBS and unequivovally made moderate gains in Treasuries. All told, not a massive reaction to the first data of the day (and it likely shouldn't be, given its closeness to consensus), but neither was it a negative one.

The next and only other piece of data this morning is the Philly Fed Index at 10am. Consensus is for the headline index to come in at 3.0 vs 2.0 last time. This data series occasionally produces a big miss and equally big reactions. The potential is there, but it can be equally tepid if close to consensus.

Fannie 3.0s just turned positive, up 1 tick on the day at 104-06 and 10yr yields are down a bit more than half a bp from 5pm levels at 1.69. A few larger trades have come in just after the stock market opened with equities edging lower in the first few minutes. S&P's are still just barely positive on the day at 1552.57

- Claims 352k vs 350k consensus
- 4-week average 361,250 vs 358,500 previously
- Continued Claims 3.068 mln vs 3.075 mln consensus
- Market Reaction: Minimal, but slightly positive

In the week ending April 6, the advance figure for seasonally adjusted initial claims was 346,000, a decrease of 42,000 from the previous week's revised figure of 388,000. The 4-week moving average was 358,000, an increase of 3,000 from the previous week's revised average of 355,000.

The advance seasonally adjusted insured unemployment rate was 2.4 percent for the week ending March 30, unchanged from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending March 30 was 3,079,000, a decrease of 12,000 from the preceding week's revised level of 3,091,000. The 4-week moving average was 3,079,250, an increase of 5,250 from the preceding week's revised average of 3,074,000.