MBS MID-DAY: Still Underperforming, but Prices Improve After Data

MBS Pricing Snapshot

- Factory Oders +1.0 vs +1.5 forecast

New orders for manufactured goods in April, up two of the last three months, increased $4.9 billion or 1.0 percent to $474.0 billion, the U.S. Census Bureau reported today. This followed a 4.7 percent March decrease. Excluding transportation, new orders decreased 0.1 percent.

Shipments, down two consecutive months, decreased $3.5 billion or 0.7 percent to $478.7 billion. This followed a 1.5 percent March decrease.

Unfilled orders, up two of the last three months, increased $2.6 billion or 0.3 percent to $995.9 billion. This followed a 0.6 percent March decrease. The unfilled orders-to-shipments ratio was 6.26, up from 6.21 in March.

Inventories, up five consecutive months, increased $1.1 billion or 0.2 percent to $627.9 billion. This was at the highest level since the series was first published on a NAICS basis in 1992, and followed a slight March increase. The inventories-to-shipments ratio was 1.31, up from 1.30 in March.

- PMI 53.7 vs 53.5 forecast
- Activity 56.5 vs 55.2 forecast
- Employment 50.1 vs 51.2 previously
- Market Reaction: "risk off" trade to a very moderate extent with Treasury yields/stock prices slightly lower and MBS slightly higher

The NMI™ registered 53.7 percent in May, 0.6 percentage point higher than the 53.1 percent registered in April. This indicates continued growth at a slightly faster rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 56.5 percent, which is 1.5 percentage points higher than the 55 percent reported in April, reflecting growth for the 46th consecutive month. The New Orders Index increased by 1.5 percentage points to 56 percent, and the Employment Index decreased 1.9 percentage points to 50.1 percent, indicating growth in employment for the 10th consecutive month. The Prices Index decreased 0.1 percentage point to 51.1 percent, indicating prices increased at a slower rate in May when compared to April. According to the NMI™, 13 non-manufacturing industries reported growth in May. The majority of respondents' comments are optimistic about business conditions. However, there is a degree of uncertainty about the long-term outlook.

First of all, at the time of this update, MBS prices are slightly better on the day withh 3.5s up 3 ticks and 3.0s up 7 ticks. Looking beyond the pure day-over-day price changes, however, and the red-faced, teary-eyed temper tantrum continues for MBS this morning. What in the world does that mean?

Some background on this tantrum showed up in this morning's commentary, though it was conveyed there as MBS bleeding on the sidewalk. The imagery is graphic, but not nearly as disturbing as the beating that MBS continue to take relative to Treasuries. Versus the roughly unchanged levels mentioned above, Treasuries are well into the green, and the levels of outperformance have been similar all week.

In the playground of the bond market, MBS have recently been among the popular crowd. QE3 amounted to a 'shiny new ball' that set the tone for everyone's enjoyment of the game. But the games have grown increasingly less enjoyable for MBS themselves.

In other words, the collection of factors mentioned in the link above have caused increasing disillusionment for MBS. Every day since the FOMC Minutes, MBS have been almost obligatorily weaker vs Treasuries, and have not been following the same patterns and rules that such weakness historically follows. Something is different this time.

That 'difference' is not only taking a toll on broader bond markets (because MBS and Treasuries have an interdependent relationship where enough movement in one affects the other), but it's creating an increasingly frequent case of MBS flat-to-weaker while Treasuries hold stead or improve.

After this morning's weaker-than-expected ADP numbers, MBS have managed to improve just slightly, but for that hasn't really materialized until these past 20 minutes. Before then, MBS saw Treasuries shoot lower from 2.13+ to just under 2.10, bounce, and head back to 2.13. If Treasuries hadn't held onto a supportive ceiling at that point, MBS underperformance would likely be even more pronounced than it already is.

The next major dose of data is coming up at 10am with ISM Non-Manufacturing.

- Productivity +0.5 pct vs +0.7 pct consensus
- Labor Costs -4.3 pct vs +0.5 consensus
- Labor Costs, largest decline since Q1 2009

Nonfarm business sector labor productivity increased at a 0.5 percent annual rate during the first quarter of 2013, the U.S. Bureau of Labor Statistics reported today. The increase in productivity reflects increases of 2.1 percent in output and 1.6 percent in hours worked. (All quarterly percent changes in this release are seasonally adjusted annual rates.) From the first quarter of 2012 to the first quarter of 2013, productivity increased 0.9 percent as output and hours worked increased 2.4 percent and 1.5 percent, respectively.

Labor productivity, or output per hour, is calculated by dividing an index of real output by an index of hours worked of all persons, including employees, proprietors, and unpaid family workers.

Unit labor costs in nonfarm businesses fell 4.3 percent in the first quarter of 2013, the combined effect of a 3.8 percent decrease in hourly compensation and the 0.5 percent increase in productivity. The decline in hourly compensation is the largest in the series, which begins in 1947. However, over the last four quarters hourly compensation increased 2.0 percent and unit labor costs rose 1.1 percent.

BLS defines unit labor costs as the ratio of hourly compensation to labor productivity; increases in hourly compensation tend to increase unit labor costs and increases in output per hour tend to reduce them.

- Payrolls +135k vs 165k consensus
- Last month revised to 113k from 119k

Private sector employment increased by 135,000 jobs from April to May, according to the May 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. April’s job gains were revised downward to 113,000 from 119,000.

"U.S. private sector employment increased by 135,000 jobs during the month of May 2013, a slight increase over the previous month of April," said Carlos A. Rodriguez, president and chief executive officer of ADP. "The majority of new jobs in May came from the service-providing sector, which added a total of 138,000 jobs, while the goods-producing sector recorded a loss of 3,000 jobs. Notably, a gain of 5,000 jobs in the construction industry during May was offset by a decline of 6,000 lost jobs in the manufacturing industry."

Mark Zandi, chief economist of Moody’s Analytics, said, "The job market continues to expand, but growth has slowed since the beginning of the year. The slowdown is evident across all industries and all but the largest companies. Manufacturers are reducing payrolls. The softer job market this spring is largely due to significant fiscal drag from tax increases and government spending cuts."