MBS MID-DAY: New Highs of The Year Ahead of FOMC
By:
Matthew Graham
•
MBS Live: MBS Morning Market Summary
MBS prices love it when a plan comes together, and that has been the case this morning. The plan--not just for MBS, but broader bond markets too--was to "lead off" just outside the confines of their recent range; in this case, positively. The lead-off doesn't have anything to do with EXPECTATIONS that something will happen. It's not as if bond markets are attempting to "get ahead" of a trade they think WILL happen. Rather, when the market is moving as it has been, such lead-offs are a less risky position to be in when it comes time to react to the data. If, for instance, this morning's ADP report would have been stronger than expected, it wouldn't be much to ask of 10yr yields to simply return to their 1.67-ish ledge. There would still be other economic data ahead, as well as the Fed, ECB, and NFP over the next 2 days.
The fact that ADP was weaker simply allows bond markets to EXTEND the lead off they were already taking. While this doesn't connote "expectation," it is a way of playing defense against risk. When the market moves too far, too fast, traders are at risk of being painfully far out of the market. This morning's movement has thus partly been an organic reaction to the data itself, but boosted by the desire to play defense against further movement in the same direction. This might be described as "buy the rumor, sell the news," except that's not really what's happening.
More like "defend against the possibility of the rumor, while remaining in the best stance possible to react to the news," and in this case, "defense" is good for MBS. Prices are at the highs of the year. The buzz over this afternoon's FOMC Announcement is that the Fed can't/won't change much, but it remains a significant event. Markets are still looking for any confirmation that the Fed is officially feeling a shift in the tone of "QE tapering rhetoric" due to recently more downbeat data and utter absence of inflation. Current levels seem to be pricing in the notion that the Fed says nothing that's incrementally more positive on the economy or negative on QE.
MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.
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Morning Reprice Alerts and Updates
Below is a recap of instant Reprice Alerts and updates issued via email and text alert to MBS Live subscribers this morning.
10:15AM :
ECON: ISM Manufacturing Narrowly Misses Expectations; Weak Internal Components
- ISM Manufacturing PMI 50.7 vs 50.9 forecast
- Prices Paid 50.0 vs 53.0 forecast
- New Orders rise slightly, 52.3 vs 51.4 previously
- Employment 50.2 vs 54.2 previously
- PMI lowest since Dec
- Employment lowest since Nov
- Prices lowest since July
"The PMI™ registered 50.7 percent, a decrease of 0.6 percentage point from March's reading of 51.3 percent, indicating expansion in manufacturing for the fifth consecutive month, but at the lowest rate of the year. The New Orders Index increased in April by 0.9 percentage point to 52.3 percent, and the Production Index increased by 1.3 percentage points to 53.5 percent. The Employment Index registered 50.2 percent, a decrease of 4 percentage points compared to March's reading of 54.2 percent. The Prices Index registered 50 percent, decreasing 4.5 percentage points from March, indicating that overall raw materials prices remained unchanged from last month. Comments from the panel indicate a range of strong/steady growth, to flat/declining volumes, depending upon the particular industry."
- Prices Paid 50.0 vs 53.0 forecast
- New Orders rise slightly, 52.3 vs 51.4 previously
- Employment 50.2 vs 54.2 previously
- PMI lowest since Dec
- Employment lowest since Nov
- Prices lowest since July
"The PMI™ registered 50.7 percent, a decrease of 0.6 percentage point from March's reading of 51.3 percent, indicating expansion in manufacturing for the fifth consecutive month, but at the lowest rate of the year. The New Orders Index increased in April by 0.9 percentage point to 52.3 percent, and the Production Index increased by 1.3 percentage points to 53.5 percent. The Employment Index registered 50.2 percent, a decrease of 4 percentage points compared to March's reading of 54.2 percent. The Prices Index registered 50 percent, decreasing 4.5 percentage points from March, indicating that overall raw materials prices remained unchanged from last month. Comments from the panel indicate a range of strong/steady growth, to flat/declining volumes, depending upon the particular industry."
9:36AM :
On The Edge Of Positive Lead-Off Range After AM Data
The overnight session was completely uneventful for Treasuries, as would be expected with the EU May Day holiday. 10's and MBS both walked in the door at unchanged levels vs Tuesday night.
We'd been looking forward to this morning's ADP release as the best early indication of Private Payroll component of Friday's jobs report. It's not a perfect relationship (CHART), but markets are paying an increasing amount of attention since ADP changed the methodology of the report. When it came in on the low end of the consensus range, bond markets began to rally.
With the help of 9am's Treasury Refunding Announcement, which hinted at potentially decreased supply in the coming quarter (less supply implies a net benefit to prices, thus implying lower rates), 10yr yields fell to yesterday's 1.638 lows. MBS similarly moved to yesterday's best levels with Fannie 3.0s at 104-25.
Given the bond-market-specific nature of some of this morning's data, equities are understandably having less of a reaction. S&P's are only off about 3 points at the moment. Both sides of the market are looking forward to the ISM Manufacturing data coming up at 10am to either give the current movement a bit of an extra push, or to hem-in bond markets' run to recent range limits.
We'd been looking forward to this morning's ADP release as the best early indication of Private Payroll component of Friday's jobs report. It's not a perfect relationship (CHART), but markets are paying an increasing amount of attention since ADP changed the methodology of the report. When it came in on the low end of the consensus range, bond markets began to rally.
With the help of 9am's Treasury Refunding Announcement, which hinted at potentially decreased supply in the coming quarter (less supply implies a net benefit to prices, thus implying lower rates), 10yr yields fell to yesterday's 1.638 lows. MBS similarly moved to yesterday's best levels with Fannie 3.0s at 104-25.
Given the bond-market-specific nature of some of this morning's data, equities are understandably having less of a reaction. S&P's are only off about 3 points at the moment. Both sides of the market are looking forward to the ISM Manufacturing data coming up at 10am to either give the current movement a bit of an extra push, or to hem-in bond markets' run to recent range limits.
9:16AM :
ECON: Treasury Hints At Decreased Supply In Coming Quarter
- At a glance: this is the scheduled announcement of how much debt the Treasury plans to issue in the coming quarter. It's notable in that Treasury mentions potentially decreased borrowing needs during this time and will adjust the auction sizes down as needed. This would decrease the "supply" side of the "supply/demand" equation in bond markets, implying a net positive effect on price (lowering yield).
The U.S. Department of the Treasury is offering $72 billion of Treasury securities to refund approximately - -$59.6 billion of securities maturing on May 15, 2013. This will raise approximately $12.4 billion of new cash. The securities are:
The balance of Treasury financing requirements will be met with the weekly bill auctions, cash management bills, the monthly note and bond auctions, the May 10-year Treasury Inflation Protected Security (TIPS) reopening auction, the June 30-year TIPS reopening auction, and the July 10-year TIPS auction.
The U.S. Department of the Treasury is offering $72 billion of Treasury securities to refund approximately - -$59.6 billion of securities maturing on May 15, 2013. This will raise approximately $12.4 billion of new cash. The securities are:
- A 3-year note in the amount of $32 billion, maturing May 15, 2016;
- A 10-year note in the amount of $24 billion, maturing May 15, 2023; and
- A 30-year bond in the amount of $16 billion, maturing May 15, 2043.
The balance of Treasury financing requirements will be met with the weekly bill auctions, cash management bills, the monthly note and bond auctions, the May 10-year Treasury Inflation Protected Security (TIPS) reopening auction, the June 30-year TIPS reopening auction, and the July 10-year TIPS auction.
9:12AM :
ECON: Markit PMI In Line With Initial 'Flash' Estimate
- Manufacturing PMI 52.1 vs 52.0 initially
- Most of the report's internal components were very close to the initial reading, which Markit refers to as the "Flash" reading. Markit is a London-based firm that publishes PMI's globally whereas the Institute for Supply Management (ISM) publishes the longstanding domestic PMI's (Purchasing Manager's Indices). ISM's will be out at 10am today, and is seen coming in at 50.9 vs 54.5 previously, which would be a bigger drop than that suggested by Markit in this report.
"At 52.1 in April, down from 54.6 in March, the final Markit U.S. Manufacturing Purchasing Managers’ Index (PMI) signalled the weakest manufacturing expansion in six months. The PMI fell to its sharpest degree since June 2010 and was consistent with only a modest improvement in overall business conditions.
Although manufacturers received a larger volume of new work in April, linked to new product launches as well as new contract wins, the overall rise was modest and much weaker than seen in March. The corresponding index fell almost four points over the month, signalling the weakest rate of new order growth in six months.
However, the slower rise in total new orders generally reflected weakness in the domestic market, as new export work rose modestly and at the same rate as March."
- Most of the report's internal components were very close to the initial reading, which Markit refers to as the "Flash" reading. Markit is a London-based firm that publishes PMI's globally whereas the Institute for Supply Management (ISM) publishes the longstanding domestic PMI's (Purchasing Manager's Indices). ISM's will be out at 10am today, and is seen coming in at 50.9 vs 54.5 previously, which would be a bigger drop than that suggested by Markit in this report.
"At 52.1 in April, down from 54.6 in March, the final Markit U.S. Manufacturing Purchasing Managers’ Index (PMI) signalled the weakest manufacturing expansion in six months. The PMI fell to its sharpest degree since June 2010 and was consistent with only a modest improvement in overall business conditions.
Although manufacturers received a larger volume of new work in April, linked to new product launches as well as new contract wins, the overall rise was modest and much weaker than seen in March. The corresponding index fell almost four points over the month, signalling the weakest rate of new order growth in six months.
However, the slower rise in total new orders generally reflected weakness in the domestic market, as new export work rose modestly and at the same rate as March."
8:26AM :
ECON: ADP Private Payrolls Lowest Since September
- ADP Payrolls +119k vs +150k forecast
- Last month revised lower to 131k from 158k
- Lowest since September 2012
Private sector employment increased by 119,000 jobs from March to April, according to the April ADP National Employment Report®, which is produced by ADP, a leading provider of human capital management solutions, in collaboration with Moody’s Analytics. The report, which is derived from ADP’s actual payroll data, measures the change in total nonfarm private employment each month on a seasonally-adjusted basis. The March report, which reported job gains of 158,000, was revised downward to 131,000 jobs.
- Last month revised lower to 131k from 158k
- Lowest since September 2012
Private sector employment increased by 119,000 jobs from March to April, according to the April ADP National Employment Report®, which is produced by ADP, a leading provider of human capital management solutions, in collaboration with Moody’s Analytics. The report, which is derived from ADP’s actual payroll data, measures the change in total nonfarm private employment each month on a seasonally-adjusted basis. The March report, which reported job gains of 158,000, was revised downward to 131,000 jobs.
Live Chat Featured Comments
A recap of the featured comments from the MBS Live Dashboard's Live Chat feature, utilized by hundreds of industry professionals each day.
Ted Rood : "Did someone say "deflation"???"
Brayden Alexander : "NFP should be ugly this Friday"
Matthew Graham : "RTRS- ISM U.S. MANUFACTURING PRICES PAID INDEX LOWEST SINCE JULY "
Matthew Graham : "RTRS- ISM U.S. MANUFACTURING EMPLOYMENT INDEX 50.2 IN APRIL VS 54.2 IN MARCH "
Matthew Graham : "RTRS- ISM U.S. MANUFACTURING ACTIVITY INDEX LOWEST SINCE DECEMBER "
Matthew Graham : "RTRS- ISM REPORT ON U.S. MANUFACTURING SHOWS PMI AT 50.7 IN APRIL (CONSENSUS 50.9) VS 51.3 IN MARCH "
Matthew Graham : "RTRS- US MAR CONSTRUCTION SPENDING -1.7 PCT (CONSENSUS +0.7 PCT) TO $856.7 BLN VS FEB +1.5 PCT (PREV +1.2 PCT) "
Steve Chizmadia : "Chart is starting to look very similar to yesterdays. Heres to hoping we don't fall to 104-19 in the 10-12 EST hours"
Matthew Graham : "RTRS - TREASURY SAYS ANTICIPATES SEASONAL DECLINE IN BORROWING NEEDS WILL LAST THROUGH THE REMAINDER OF THIRD FISCAL QUARTER "
Matthew Graham : "RTRS - TREASURY SAYS EXPECTS TO KEEP NOTES AND BOND AUCTION SIZES STABLE IN COMING QUARTER, BUT MAY DECIDE TO GRADUALLY DECREASE COUPON AUCTION SIZE DEPENDING ON FISCAL SITUATION "
Matthew Graham : "RTRS- U.S. TO SELL $32 BLN 3-YEAR, $24 BLN 10-YEAR NOTES, $16 BLN 30-YEAR BONDS NEXT WEEK "
Matthew Graham : "Here's the Treasury Refunding Announcement that there was some buzz about earlier this week:"
Matthew Graham : "This is the final version of the "flash" (early estimate) that was out earlier in the month, and is essentially right in line."
Matthew Graham : "RTRS- MARKIT U.S. MANUFACTURING SECTOR FINAL PMI FOR APRIL AT 52.1 VS FLASH READING 52.0 AND MARCH'S 54.6 "
B-C : "http://www.astonlau.com/2012/03/a-history-of-fha-mortgage-insurance-premium-changes/"
Tim Mitchell : "Can someone re-post the link for the historical FHA UFMIP rates?"
Christopher Stevens : "MG- doesn't look like that base runner wants to take too much of a lead just yet. Maybe Bernake gets a hit sending runner to second and NFP hits a double sending the runner home and the 10YR to the lows of last November."
Matthew Graham : "the month to month variations make it seem like it's been a lousy forward indicator, but the longer term view is surprising IMO: http://tinyurl.com/d9jtcfu"
Oliver S. Orlicki : "should make for an interesting next couple of days leading into NFP"
Oliver S. Orlicki : "swing and a miss"
Matthew Graham : "RTRS- US ADP MARCH PAYROLL CHANGE REVISED TO +131,000 FROM +158,000 "
Matthew Graham : "RTRS- REUTERS CONSENSUS FORECAST FOR ADP PAYROLL CHANGE FOR APRIL WAS FOR INCREASE OF 150,000 JOBS "
Matthew Graham : "RTRS- ADP NATIONAL EMPLOYMENT REPORT SHOWS U.S. EMPLOYMENT INCREASED BY 119,000 PRIVATE SECTOR JOBS IN APRIL"
Jeff Anderson : "GM, all. Love the baseball analogies in the Day Ahead. Especially with the Red Sox the best team in baseball currently. Just saying. Right, VB?"
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