MBS MID-DAY: Morning Weakness Turns Positive After ISM Data

MBS Pricing Snapshot

- Overall Construction Spending +0.4 vs +0.8 Forecast
- Private Spending +1.0 vs -1.2 previously
- public spending lowest since March 2006 (state/local)
- public spending lowest since June 2008 (Federal)

The U.S. Census Bureau of the Department of Commerce announced today that construction spending during April 2013 was estimated at a seasonally adjusted annual rate of $860.8 billion, 0.4 percent (±1.6%)* above the revised March estimate of $857.7 billion. The April figure is 4.3 percent (±2.0%) above the April 2012 estimate of $825.1 billion.

During the first 4 months of this year, construction spending amounted to $250.7 billion, 4.5 percent (±1.5%) above the $239.8 billion for the same period in 2012.

Spending on private construction was at a seasonally adjusted annual rate of $602.0 billion, 1.0 percent (±1.2%)* above the revised March estimate of $595.9 billion. Residential construction was at a seasonally adjusted annual rate of $301.9 billion in April, 0.1 percent (±1.3%)* below the revised March estimate of $302.2 billion. Nonresidential construction was at a seasonally adjusted annual rate of $300.1 billion in April, 2.2 percent (±1.2%) above the revised March estimate of $293.7 billion.

In April, the estimated seasonally adjusted annual rate of public construction spending was $258.8 billion, 1.2 percent (±2.8%)* below the revised March estimate of $261.8 billion. Educational construction was at a seasonally adjusted annual rate of $58.7 billion, 4.4 percent (±4.4%)* below the revised March estimate of $61.4 billion. Highway construction was at a seasonally adjusted annual rate of $76.7 billion, 0.5 percent (±9.9%)* above the revised March estimate of $76.2 billion.

- Headline PMI 49.0 vs 50.7 forecast
- New Orders 48.8 vs 52.3 previously
- Employment 50.1 vs 50.2 previously
- Manufacturing Activity lowest since June 2009
- First Contraction Since November 2012

-Market Reaction: broadly positive for bond markets so far with Treasuries reaping a majority of the benefits.

The PMI™ registered 49 percent, a decrease of 1.7 percentage points from April's reading of 50.7 percent, indicating contraction in manufacturing for the first time since November 2012 and only the second time since July 2009. This month's PMI™ reading is at its lowest level since June 2009, when it registered 45.8 percent. The New Orders Index decreased in May by 3.5 percentage points to 48.8 percent, and the Production Index decreased by 4.9 percentage points to 48.6 percent. The Employment Index registered 50.1 percent, a slight decrease of 0.1 percentage point compared to April's reading of 50.2 percent. The Prices Index registered 49.5 percent, decreasing 0.5 percentage point from April, indicating that overall raw materials prices decreased from last month. Several comments from the panel indicate a flattening or softening in demand due to a sluggish economy, both domestically and globally.

ISM Manufacturing came in much weaker than expected. MBS have turned green as a result and 10yr yields are down a quick 5 bps to 2.119. The movement hasn't played out yet, but so far, so good.

The overnight session began decently enough for Treasuries as 10's were only forced to endure about 2bps of weakness at the open. Weaker Asian PMIs coincided with falling equities and Japanese bond yields, but US 10's simply held a sideways range centered on 2.145 until the European open.

Markit Manufacturing PMIs were unanimously stronger-than-expected in Europe. This got the ball rolling back in a "risk-on" direction with stocks and bond yields moving higher. German Bunds swung 7bps higher while US Treasuries followed with a 4.5bp move of their own. 10's were as high as 2.187 just before the domestic open.

As domestic accounts began warming up for the day, Treasuries improved modestly, but remained in weaker territory vs Friday's levels into the 8am hour. 10's hit 2.153 at their best so far this AM and are now back up to 2.164.

Fannie 3.0 MBS began the session 14 ticks weaker at 100-08, improved to 100-13, and have since leveled off with Treasuries (down 11 ticks at 100-11). Fannie 3.5s are down 10 ticks at 103-13 currently. Equities futures are pointing to a slightly positive open after Friday afternoon's massive sell-off, but are nowhere near Friday morning levels. In terms of data, Construction Spending and ISM Manufacturing are coming up at 10am.

- Final PMI for May 52.3 vs 51.9 initially, 52.1 in April
- Ouput 52.7 vs 52.8 initially, 53.7 April
- New Orders 53.3 vs 52.8 initially, 51.5 in April

The final Markit U.S. Manufacturing Purchasing Managers’ Index signalled a further improvement in manufacturing business conditions in May. However, at 52.3, up slightly from a six-month low of 52.1 in April and higher than the earlier flash estimate of 51.9, the PMI was consistent with only a modest rate of growth.