MBS MID-DAY: Summers Withdrawal Rally Runs its Course

MBS Pricing Snapshot

- Industrial Production +0.4, as expected
- Capacity Utilization 77.8, as expected
- Market Reaction: bond markets holding ground near 2.79 in 10's and improving consistently in MBS with Fannie 4.0s up to 103-13.

Industrial production advanced 0.4 percent in August after having been unchanged in July; the gains in August were broadly based. Following a decrease in July of 0.4 percent, which was steeper than previously reported, manufacturing production rose 0.7 percent in August. The output of mines moved up 0.3 percent, its fifth consecutive monthly increase, and the production of utilities fell 1.5 percent, its fifth consecutive monthly decrease. At 99.4 percent of its 2007 average, total industrial production in August was 2.7 percent above its year-earlier level. Capacity utilization for the industrial sector increased 0.2 percentage point in August to 77.8 percent, a rate 0.6 percentage point above its level of a year earlier and 2.4 percentage points below its long-run (1972-2012) average.

With Japan out on Holiday, US Treasuries began the overnight session with futures trading only (vs. "cash," which would normally be trading as well. That merely means that we have to extrapolate where 10yr yields would have been at their best levels of the night, after Larry Summers announced he was pulling out of the race for the Fed Chair.

The initial surge in prices took Treasury futures to levels consistent with yields in the mid-to-high 2.7's though they'd fallen back a bit by the time cash Treasuries actually began trading in Europe.

Even so, yields were sharply lower--hovering near 2.8 to 2.82 ahead of the domestic session and are currently pushing down into the 2.7's (2.789 currently).

MBS opened roughly 20 ticks stronger and have gained another 3 ticks since then, bringing Fannie 4.0s over 103 (103-10 currently) for the first time since August 30th.

- NY Fed Empire State Index +6.29 vs +9.20 forecast
- Employment +7.53 vs +10.84 previously - All other relevant internal components were as strong or stronger than the last report, mitigating some of the effects from the headline.

The August 2013 Empire State Manufacturing Survey indicates that conditions for New York manufacturers improved modestly for a third consecutive month. The general business conditions index, at 8.2, was little changed from last month.

The new orders index slipped four points to 0.3 and the shipments index fell seven points to 1.5, suggesting that both orders and shipments were flat. The prices paid index rose slightly to 20.5, and the prices received index climbed three points to 3.6.

Labor market conditions improved, with the index for number of employees climbing eight points to 10.8 and the average workweek index rising twelve points to 4.8. Both of these indexes reached their highest levels in a year.

Indexes for the six-month outlook generally pointed to strong optimism about future business activity; the future general business conditions index rose five points to 37.4, its highest level in more than a year.

In response to a series of supplementary questions, manufacturers predicted that overall sales or revenues would be 5 percent higher in 2013 than in 2012; employment levels and capital spending were expected to be little changed from last year.

Also, more respondents reported that they had scaled back than raised their sales expectations for 2013 from what they had anticipated at the beginning of the year. Hiring and capital spending plans for 2013 were only slightly less positive than at the beginning of the year. For more details, see the full supplemental report.