MBS MID-DAY: Bounce Back/Rally Gains Traction

MBS Pricing Snapshot

- Business Conditions -5.2 vs +2.4 consensus, +1.3 previous
- 6-month Outlook 32.3 vs 19.5
- New orders -7.9 vs -1.0 previously
- Employment -8.7 vs -6.8 previously
- Employment index lowest since Sept 2009

Manufacturing firms responding to the monthly Business Outlook Survey suggest that regional manufacturing activity weakened this month. All of the survey’s broadest current indicators were negative this month, indicating weaker conditions compared with April. The survey's indicators of future activity improved, however, and suggest that firms expect overall growth over the next six months.

RTRSThe survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from 1.3 in April to -5.2 this month. The current activity index has shown no pattern of sustained growth over the past seven months, generally alternating between positive and negative readings (see Chart). The number of firms reporting decreased activity this month (29 percent) edged out those reporting increased activity (24 percent).

Overnight Treasury trading was some of the least eventful of the week with 10's almost perfectly flat during Asian hours. Some weakness crept in to the European session, heading into domestic hours, but never enough to challenge yesterday's high yields.

MBS opened in line with yesterday's close and soon moved quickly higher after all three of the 8:30am economic reports were bond-market-friendly. The gains quickly took Fannie 3.0s to yesterday's highs at 102-28+, where they struggled for nearly half an hour. Over the past 10 minutes, we're seeing them move higher, currently up to 103-31+.

The test of the technical ceiling in MBS coincides with a similar test of an important short term floor in 10yr yields (set by the lows on Monday and Tuesday at 1.893 and 1.895). 10's haven't moved through the floor yet, but did notch down to test it, briefly hitting 1.895. They've since bounced back to 1.90.

All things being equal, it would be nicer to be moving through that floor in 10's, but after 9 days of pain for bond markets, we'll take "possibility" over "pain." Philly Fed data is yet to come at 10am and if it's aligned with the rest of the morning data, we could see a more concerted effort to get to the other side of technicals. Unless that happens, this morning's relative victory may prove to be a bit hollow, especially if it ultimately reinforces the week's floor in yields.

- CPI -0.4 vs -0.2 f'cast
- Core CPI +0.1 vs +0.2 f'cast
- Annual Core +1.7 vs +1.8 f'cast
- Market Reaction: non-issue, but absence of inflation in general, provides an acceptable environment for QE. In other words, this data doesn't necessarily promote QE, but it has no objections.

The Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.4 percent in April on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.1 percent before seasonal adjustment.

As was the case in March, a sharp decrease in the gasoline index was the primary cause of the decline in the seasonally adjusted all items index. The fuel oil index also declined while the electricity and natural gas indexes increased; the net result was a 4.3 percent decrease in the energy index. The food index, unchanged in March, rose 0.2 percent in April.

The index for all items less food and energy increased 0.1 percent in April, the same increase as in March. The indexes for shelter, used cars and trucks, new vehicles, and tobacco all increased in April. These increases were partially offset by declines in the indexes for apparel, airline fares, and recreation.

The all items index increased 1.1 percent over the last 12 months, the smallest 12-month increase since November 2010. The index for all items less food and energy increased 1.7 percent over the span; this was its smallest 12-month increase since June 2011. The food index rose 1.5 percent while the energy index declined 4.3 percent.

- Housing Starts -16.5 pct vs +5.4 previously
- Unit rate of 853k vs 973k Consensus
- Permits 1.017 mln vs 945k consensus
- Single Fam starts -2.1 pct, Multi -38.9 pct

Privately-owned housing units authorized by building permits in April were at a seasonally adjusted annual rate of 1,017,000. This is 14.3 percent (±1.0%) above the revised March rate of 890,000 and is 35.8 percent (±1.3%) above the April 2012 estimate of 749,000. Single-family authorizations in April were at a rate of 617,000; this is 3.0 percent (±0.9%) above the revised March figure of 599,000. Authorizations of units in buildings with five units or more were at a rate of 374,000 in April.

Privately-owned housing starts in April were at a seasonally adjusted annual rate of 853,000. This is 16.5 percent (±5.2%) below the revised March estimate of 1,021,000, but is 13.1 percent (±5.1%) above the April 2012 rate of 754,000. Single-family housing starts in April were at a rate of 610,000; this is 2.1 percent (±4.8%)* below the revised March figure of 623,000. The April rate for units in buildings with five units or more was 234,000.

Privately-owned housing completions in April were at a seasonally adjusted annual rate of 689,000. This is 14.3 percent (±11.2%) below the revised March estimate of 804,000, but is 3.3 percent (±11.9%)* above the April 2012 rate of 667,000. Single-family housing completions in April were at a rate of 536,000; this is 9.8 percent (±10.2%)* below the revised March rate of 594,000. The April rate for units in buildings with five units or more was 149,000

- Claims up to 360k vs 330k consensus
- Continued Claims down to 3.009 mln vs 3.0 forecast, 3.013 previously

- Market Reaction: Positive for both MBS and Treasuries. Fannie 3.0's revisiting yesterday's highs at 102-28.

In the week ending May 11, the advance figure for seasonally adjusted initial claims was 360,000, an increase of 32,000 from the previous week's revised figure of 328,000. The 4-week moving average was 339,250, an increase of 1,250 from the previous week's revised average of 338,000.

The advance seasonally adjusted insured unemployment rate was 2.3 percent for the week ending May 4, unchanged from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending May 4 was 3,009,000, a decrease of 4,000 from the preceding week's revised level of 3,013,000. The 4-week moving average was 3,015,250, a decrease of 21,000 from the preceding week's revised average of 3,036,250.