MBS MID-DAY: Cautious but Meaningful Rally After ADP Data

MBS Pricing Snapshot

Treasuries were flat at the start of the overnight session, but soon rallied to their best levels in what would best be classified as "mini-snowball" buying. Volume wasn't impressive, but it did pick during the brief surge as technical "stops" were triggered forcing in more buyers (traders' preset lines in the sand that, if hit, prompt automatic buying or selling--in this case, buying).

After dipping below 2.48 just after 2am, and bouncing quickly back to 2.49, 10yr yields crept sideways and slightly higher into the domestic session--coming in the door about a bp lower than yesterday. MBS opened several ticks higher.

From there, the ADP numbers brought an expected surge in volume, and made a brief head-fake toward stronger territory. We soon saw how much hesitation we're dealing with today as both Treasuries and MBS bounced firmly before breaking last week's best levels. If it's any consolation, MBS were much closer than Treasuries. CPI data fell on deaf ears--no surprise there.

The best bet at the moment is that the combination of the week's last Treasury auction and the FOMC Announcement is serving to keep domestic bond markets much more hesitant than they otherwise might be. In fact, that's much more than just a "one day" thing, and it's no guarantee that this afternoon's events are what we're waiting for to change it.

Between now and then, we're in pretty good shape so far, just not rallying as much as we might expect given the weak ADP numbers. Fannie 3.5s are currently up 5 ticks at 102-28 and 10's are down 1.5bps at 2.49. We'll reserve judgment on the day's overall strength (or lack thereof?) until after FOMC at 2pm.

- CPI +0.2 vs +0.2 forecast
- Core CPI +0.1 vs +0.2 forecast
- Year over year CPI +1.2, as expected, Core +1.7 vs +1.8 Forecast
- Market Reaction: None. Inflation is in "not a threat" mode until proven otherwise via months of consistently troubling data across multiple reports. Until then, it's a waste of space that we're forced to cover.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in September on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.2 percent before seasonal adjustment.

The energy index rose 0.8 percent in September and accounted for about half of the seasonally adjusted all items increase. All the major energy component indexes rose in September. The food index was unchanged, with declines in the indexes for fruits and vegetables and for nonalcoholic beverages offsetting increases in other indexes.

The index for all items less food and energy rose 0.1 percent in September, the same increase as in August. The shelter and medical care indexes also advanced and accounted for most of this increase. The indexes for new vehicles and for airline fares rose as well, while the apparel and recreation indexes declined.

- Private payrolls 130k vs 150k forecast
- Previous reports revised down to 145k from 166k
- Smallest increase since April
- Market Reaction: Bond markets add to gains but hit resistance

Private sector employment increased by 130,000 jobs from September to October, according to the October 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. September’s job gain was revised down from 166,000 to 145,000.