MBS MID-DAY: Yesterday's Gains Doubled and Holding

MBS Pricing Snapshot

- Business conditions 19.8 vs 15.0 forecast, 22.3 previous
- 6-mo outlook 60.8 vs 58.2 previous
- New Orders 27.5 vs 21.2 previous
- Employment Index 15.4 vs 10.3 previous

-Market Reaction: Not much so far. Slight move weaker right at 10am, but recovered and back to pre-data levels now.

Manufacturing growth in the region continued in October, according to firms responding to this month’s Business Outlook Survey. The survey’s broadest indicators for general activity, new orders, shipments, and employment were positive, signifying growth. The survey's indicators of future activity suggest continued optimism about growth over the next six months. Indicators Suggest Continuing Expansion

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, edged down from 22.3 in September to 19.8 this month (see Chart). The index has now been positive for five consecutive months. The percentage of firms reporting increased activity this month (36 percent) was greater than the percentage reporting decreased activity (16 percent).

The demand for manufactured goods, as measured by the current new orders index, increased 6 points, to 27.5, its highest reading since March 2011. Shipments continued to expand: The index fell 1 point to 20.4, following a 22 point increase last month. The diffusion indexes for inventories, delivery times, and unfilled orders were all positive and higher than last month.

Labor market indicators showed improvement this month. The current employment index increased 5 points, to 15.4, its highest reading since May 2011. The percentage of firms reporting increases in employment (23 percent) exceeded the percentage reporting decreases (8 percent).

After gaining half a point yesterday, Fannie 3.5s are already 3/8ths of a point higher this morning. Most of those gains were already intact by the time MBS began trading, and came courtesy of last night's passage of the Senate-drafted debt deal that dominated yesterday's headlines.

The promise of said deal indirectly fueled an afternoon rally in Treasuries and broader bond markets. The pace had leveled off by the close, though retained a mildly positive bias through Asian trading hours. When Europe came online for the day, overnight Treasuries received another shot of bullish adrenaline, pushing 10yr yields back down to 2.61's by 4am.

There has been some ebb and flow since then, but 10's have gone no higher than 2.634 and the domestic session has been uneventfully positive so far. Jobless Claims data was mostly passed over as traders give it time to calm down and exhibit more consistency before reading in to the numbers. Philly Fed data is coming up at 10am and has a better chance to illicit a reaction.

- Claims 358k vs 335k forecast
- Continued Claims 2.859 mln vs 2.915 mln forecast
- Market Reaction: Limited (because who even knows what to believe from this data set any more) but slightly positive for bond markets.

In the week ending October 12, the advance figure for seasonally adjusted initial claims was 358,000, a decrease of 15,000 from the previous week's revised figure of 373,000. The 4-week moving average was 336,500, an increase of 11,750 from the previous week's revised average of 324,750.

The advance seasonally adjusted insured unemployment rate was 2.2 percent for the week ending October 5, unchanged from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending October 5 was 2,859,000, a decrease of 43,000 from the preceding week's revised level of 2,902,000. The 4-week moving average was 2,875,750, an increase of 17,750 from the preceding week's revised average of 2,858,000.