MBS MID-DAY: Bumpy Sideways Ride Heading Downhill Now

MBS Pricing Snapshot

- PMI 52.2 vs 54.0 forecast
- Business Activity 51.7 vs 56.8 forecast
- Employment Index 54.7 vs 50.1 previously
- New Orders 50.8 vs 56.0 previously
- prices paid 52.5 vs 51.1

- Market Reaction: Moderately stronger bond markets and moderately weaker equities. The fact that we're not seeing the data being taken as a statement on QE prospects (where weak data would help both stocks and bonds) is a bit puzzling considering it's a definite break from the recent norms.

The NMI™ registered 52.2 percent in June, 1.5 percentage points lower than the 53.7 percent registered in May. This indicates continued growth at a slightly slower rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 51.7 percent, which is 4.8 percentage points lower than the 56.5 percent reported in May, reflecting growth for the 47th consecutive month. The New Orders Index decreased by 5.2 percentage points to 50.8 percent, and the Employment Index increased 4.6 percentage points to 54.7 percent, indicating growth in employment for the 11th consecutive month. The Prices Index increased 1.4 percentage points to 52.5 percent, indicating prices increased at a faster rate in June when compared to May. According to the NMI™, 14 non-manufacturing industries reported growth in June. Respondents' comments are mixed about business conditions depending upon the industry and company. The majority indicate that growth has been slow and incremental; however, it is still better year over year.

Global economic and political tensions are finally speaking loud enough to translate to whispers of movement in bond markets. This isn't the same sort of 'risk-off' trading that characterized the EU Crisis, but it has given bond markets a detectable boost overnight, and taken a bite out of stocks. Further to the point of things being different this time around, the reactions are far more mild, even closer to ground zero where we would have historically seen German Bunds rally more than 6bps.

Nevertheless, it is definitely a break from the recent norm to see stocks selling while bond markets rally, and this is the major clue as far as 'risk on/off' being a consideration as opposed to 'QE on/off.' S&P futures shed over 10 pts last night while 10yr yields rallied even more than Germany, hitting recent 2-week lows at 2.415 in the wee hours.

10yr yields were already on the rise after that but remained in better shape than yesterday as the domestic session began. MBS started out a few ticks in the Green as well. Stronger-than-expected ADP employment data sent a definite min-shockwave through bond markets, causing an immediate jolt higher from just under 2.44 to just over 2.48. Fannie 3.5 MBS swung from 101-19 to 101-08 in a few minutes and bounced before readying themselves for the 8:30am data.

Jobless Claims and International Trade did little to change the situation for better or worse, but if anything, the entirety of the morning data has left 10yr yields honing in on their 2.47 technical level while MBS seem content trading a choppy range between 101-08 and 101-16, currently down 1 tick on the day at 101-11. The next significant data arrives at 10am with ISM Non-Manufacturing. Trading stops 3 hours earlier than normal today ahead of tomorrow's full Independence Day closure.

- Trade Gap $45.03 bln vs $40.1 bln consensus
- Previous reading $40.15 bln
- Exports highest since March 2012

- Market Reaction: Not as critical as employment data, but not detrimental

The U.S. Census Bureau and the U.S. Bureau of Economic Analysis, through the Department of Commerce, announced today that total May exports of $187.1 billion and imports of $232.1 billion resulted in a goods and services deficit of $45.0 billion, up from $40.1 billion in April, revised. May exports were $0.5 billion less than April exports of $187.6 billion. May imports were $4.4 billion more than April imports of $227.7 billion.

In May, the goods deficit increased $5.0 billion from April to $63.4 billion, and the services surplus increased $0.2 billion from April to $18.4 billion. Exports of goods decreased $0.9 billion to $130.3 billion, and imports of goods increased $4.2 billion to $193.7 billion. Exports of services increased $0.4 billion to $56.8 billion, and imports of services increased $0.2 billion to $38.4 billion.

The goods and services deficit decreased $1.2 billion from May 2012 to May 2013. Exports were up $2.8 billion, or 1.5 percent, and imports were up $1.6 billion, or 0.7 percent.

- Claims 343k vs 345k consensus
- Continued Claims 2.933 mln vs 2.953 mln forecast

- Market Reaction: Bond markets continue conveying the sense that the moderately stronger data is "not enough" to justify a sell-off and trading levels have bounced back a bit. MBS are in the green for now.

In the week ending June 29, the advance figure for seasonally adjusted initial claims was 343,000, a decrease of 5,000 from the previous week's revised figure of 348,000. The 4-week moving average was 345,500, a decrease of 750 from the previous week's revised average of 346,250.

The advance seasonally adjusted insured unemployment rate was 2.3 percent for the week ending June 22, unchanged from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending June 22 was 2,933,000, a decrease of 54,000 from the preceding week's revised level of 2,987,000. The 4-week moving average was 2,969,250, a decrease of 9,500 from the preceding week's revised average of 2,978,750.

- 188k vs 160k, Previous print revised from 135k to 134k
- Market reaction: Bond markets had been stronger in the overnight session with this moderately stronger than expected payrolls data erasing those gains. The rest of the morning data becomes more important than it otherwise would have been (if, for instance, ADP had beaten by a wider margin).

Private sector employment increased by 188,000 jobs from May to June, according to the June ADP National Employment Report®. The report, which is produced by ADP®, a leading provider of human capital management solutions, in collaboration with Moody’s Analytics, is derived from ADP’s actual payroll data and measures the change in total nonfarm private employment each month on a seasonally-adjusted basis. May’s job gains were revised downward to 134,000 from 135,000.