MBS MID-DAY: Lots and Lots of Pain For Bond Markets

MBS Pricing Snapshot

Earlier lenders have already repriced negatively and constant pressure on bond markets keeps the risk of additional reprices on the table. 10's are pushing their high yields of the day at 2.981 and Fannie 4.0s are heading down into the 101-20's. 2nd round reprices will soon be a risk if we slide any further and almost every lender is at some risk of an initial negative reprice.

- Factory Orders -2.4 vs -3.3 Forecast
- Reaction: This isn't the most consequential piece of economic data, but it rounds a morning of data that's been in line with, or much better than forecast. Bottom line, even if it's not hurting compared to ISM data, it's not helping either.
New orders for manufactured durable goods in July decreased $17.8 billion or 7.3 percent to $226.6 billion, the U.S. Census Bureau announced today. This decrease, down following three consecutive monthly increases and followed a 3.9 percent June increase. Excluding transportation, new orders decreased 0.6 percent. Excluding defense, new orders decreased 6.7 percent. Transportation equipment, also down following three consecutive monthly increases, led the decrease, $16.7 billion or 19.4 percent to $69.7 billion. This was led by nondefense aircraft and parts, which decreased $14.5 billion.

- Non-manufacturing PMI (aka "NMI") 58.6 vs 55.0 forecast
- Prices Paid 53.4 vs 60.1 previously
- PMI highest since December 2005
- Market Reaction: More weakness for bond markets, but relatively contained at initial loss levels so far.

"The NMI™ registered 58.6 percent in August, 2.6 percentage points higher than the 56 percent registered in July. This indicates continued growth at a faster rate in the non-manufacturing sector. This month's NMI™ is the highest reading for the index since its inception in January 2008. The Non-Manufacturing Business Activity Index increased to 62.2 percent, which is 1.8 percentage points higher than the 60.4 percent reported in July, reflecting growth for the 49th consecutive month. The New Orders Index increased by 2.8 percentage points to 60.5 percent, and the Employment Index increased 3.8 percentage points to 57 percent, indicating growth in employment for the 13th consecutive month. The Prices Index decreased 6.7 percentage points to 53.4 percent, indicating prices increased at a significantly slower rate in August when compared to July. According to the NMI™, 16 non-manufacturing industries reported growth in August. The majority of respondents' comments continue to be mostly positive about business conditions and the direction of the overall economy."

New highs for 10yr yields--crested 2.971 momentarily. MBS don't have the liquidity to react as quickly, but should be dropping under 102-00. Lenders that weren't already defensively positioned with initial rate-sheets won't take much more weakness to consider negative reprices (but most were probably positioned pretty defensively if they were already out with rates. Compare AM sheets to yesterday's latest. If you're over 3/8ths worse, most of the defensiveness is baked in).

Fannie 4.0s are fighting to hold on to the 102-00 support level that was briefly pieced just ahead of the 9:30am opening bell for stocks. We're currently back up to 102-04 and Treasuries have held their 3rd supportive ceiling of the morning around 2.95.

It's important to note that the initial rally that took place following ADP and Jobless Claims numbers (saw 10's move from 2.95 to 2.915, and Fannie 4.0s from 102 to 102-07) was not actually a rally, but very profitable short covering and consolidation after overnight weakness and bond-negative economic data.

Additionally, we should expect bigger-than-average swings in MBS to be the norm through tomorrow. At this point in the morning, bond markets are waiting for ISM Non-Manufacturing data before making their next noticeable move. It should be relatively well-contained in the big picture, but could push new price lows if the data is stronger-than expected.

- Claims 323k vs 330k forecast
- 4-wk average 328.5k vs 331.5k previously
- Continued Claims 2.951 mln vs 2.980 mln forecast

In the week ending August 31, the advance figure for seasonally adjusted initial claims was 323,000, a decrease of 9,000 from the previous week's revised figure of 332,000. The 4-week moving average was 328,500, a decrease of 3,000 from the previous week's revised average of 331,500.

The advance seasonally adjusted insured unemployment rate was 2.3 percent for the week ending August 24, unchanged from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending August 24 was 2,951,000, a decrease of 43,000 from the preceding week's revised level of 2,994,000. The 4-week moving average was 2,979,500, a decrease of 18,000 from the preceding week's revised average of 2,997,500.

- Productivity +2.3 vs +1.5 Forecast
- Labor Costs +0.0 vs +0.8 Forecast
Nonfarm business sector labor productivity increased at a 2.3 percent annual rate during the second quarter of 2013, the U.S. Bureau of Labor Statistics reported today. The increase in productivity reflects increases of 3.7 percent in output and 1.4 percent in hours worked. (All quarterly percent changes in this release are seasonally adjusted annual rates.) From the second quarter of 2012 to the second quarter of 2013, productivity increased 0.3 percent as output and hours worked rose 2.1 percent and 1.7 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. The measures released today were based on more recent source data than were available for the preliminary report.

Unit labor costs in nonfarm businesses were unchanged in the second quarter of 2013, as hourly compensation increased at the same 2.3 percent rate as productivity. Unit labor costs rose 1.5 percent over the last four quarters.

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.

- Private Payrolls +176k vs +180k Forecast
- July revised to 198k from 200k
- Market Reaction: just slightly stronger now, but still weaker than yesterday. The nearness to consensus puts a bit more emphasis on the rest of the morning's data.

Private sector employment increased by 176,000 jobs from July to August, according to the August ADP National Employment Report®. Broadly distributed to the public each month, free of charge, the ADP National Employment Report is produced by ADP®, a leading global provider of Human Capital Management (HCM) 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. July’s job gain was revised down slightly from 200,000 to 198,000

Overnight sessions like the one we just had are uncommon, and speak to an almost unique type of anxiety for bond markets. The notion of "the week beginning today" is in full effect as Treasuries simply marched steadily into weaker territory despite cues from related markets.

There was little, if any of the customary influence from Yen, Nikkei, equities futures, bunds, etc, and volume was high will 10yr yields hit new multi-year highs. 10's are up to 2.945 right now. Fannie 4.0 MBS opened more than a quarter of a point lower and are at 102-04 currently.

We're in full defense mode against an ADP beat and counting on a miss in order to reenter yesterday's range.