MBS MID-DAY: Weaker Into, and out of, ISM Data

By: Matthew Graham
MBS Live: MBS Morning Market Summary
Today's ISM Non-Manufacturing data was the focal point of the first three days of this week, and bond markets confirmed that well before it was released at 10am today.  The pressure was on right from the start and ramped up progressively heading into 10am.  This was nothing more than the realization of last week's shift toward temporarily higher rates. 

Yesterday's moderate positivity had a chance to pause or even reverse the trend, but that would have required gains today.  We have no gain--only losses.  The ISM data was only moderately stronger than expected, but the scary part for bond markets was the Employment Index (a component of the data that tracks very well with private payroll growth) coming in at 56.2 vs 52.7 previously.  Quite simply, bond markets had rallied well into last Wednesday morning and are now seeking a more balanced stance from which to approach Friday's NFP. 
MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.
FNMA 3.0
97-21 : -0-16
FNMA 3.5
101-29 : -0-12
FNMA 4.0
105-00 : -0-08
FNMA 4.5
107-00 : -0-06
GNMA 3.0
98-21 : -0-16
GNMA 3.5
102-31 : -0-14
GNMA 4.0
106-02 : -0-09
GNMA 4.5
107-23 : -0-05
FHLMC 3.0
97-06 : -0-16
FHLMC 3.5
101-18 : -0-13
FHLMC 4.0
104-20 : -0-08
FHLMC 4.5
106-21 : -0-04
Pricing as of 11:03 AM EST
Morning Reprice Alerts and Updates
Below is a recap of instant Reprice Alerts and updates issued via email and text alert to MBS Live subscribers this morning.

10:05AM  :  ALERT ISSUED: ECON: ISM Non-Manufacturing says "What Shutdown?"
- ISM Services PMI up to 55.4 vs 54.0 forecast
- 1 pt higher than last reading DESPITE THE SHUTDOWN
- Employment component 56.2 vs 52.7 previously
- All of the above continues to build the case that the shutdown had far less impact than expected and that this Friday's NFP has every chance of beating consensus in the same way. As such, we're selling off even more now.

In September, the NMI™ registered 54.4 percent, indicating continued growth in the non-manufacturing sector for the 45th consecutive month. A reading above 50 percent indicates the non-manufacturing sector economy is generally expanding; below 50 percent indicates the non-manufacturing sector is generally contracting.

SM's Non-Manufacturing Business Activity Index in September registered 55.1 percent, 7.1 percentage points lower than the 62.2 percent registered in August. Twelve industries reported increased business activity, and five industries reported decreased activity for the month of September. Comments from respondents include: "The turmoil and uncertainty of the current state of politics and the U.S. involvement overseas continues to drag on the economy" and "Seasonal growth/improved economic environment."
9:59AM  :  ALERT ISSUED: Losses Accelerate Ahead of ISM
This will be necessarily brief as the ISM data is imminent, but just another quick heads up that prices are tanking. This is all momentum. Stocks and bonds are getting hit hard and in unison--usually a sign that investors are guarding against a strong piece of economic data that could adjust the QE outlook (because less QE would hurt both stocks and bonds).

Fannie 3.5s are now down 10 ticks to the very serious level of 101-31 (because it's the first time we've seen that since the last NFP). 10yr yields are up nearly 5bps on the day at 2.65. ISM coming up in 1 minute and will either accelerate or reverse this morning's trends.
9:19AM  :  Selling Pressure Builds Ahead of ISM Data
Treasuries did a good enough job of holding their ground during Asian trading hours, but began weakening during the European session. European bond markets were on the ropes right from the start, though a much stronger-than-expected Services PMI in the UK put extra pressure on British and German debt (which US Treasuries tend to follow overnight).

The US gets its own services PMI at 10am with ISM Non-Manufacturing and concerns over a repeat performance of--well, every other PMI this past week--could be fueling some of the extra selling pressure we're seeing this morning.

As far as that pressure is concerned, 10yr yields are up to their highest levels since mid October and Fannie 3.5s are down 5 ticks to 102-04 (part of a supportive zone from 102-00 to 102-04). The ISM data is at 10am, with a forecast of 54.0 vs 54.4 previously.
Live Chat Featured Comments
A recap of the featured comments from the MBS Live Dashboard's Live Chat feature, utilized by hundreds of industry professionals each day.

Matthew Graham  :  "that comment is the perfect thesis for this morning's price action. well played"
Bryce Schetselaar  :  "Man, we could really get nailed by a better than expected NFP at this rate"
Matthew Graham  :  "RTRS- ISM NON-MANUFACTURING EMPLOYMENT INDEX 56.2 IN OCTOBER VS 52.7 IN SEPT "
Matthew Graham  :  "RTRS- ISM NON-MANUFACTURING BUSINESS ACTIVITY INDEX 59.7 IN OCTOBER (CONSENSUS 55.1) VS 55.1 IN SEPT "
Matthew Graham  :  "RTRS- ISM NON-MANUFACTURING NEW ORDERS INDEX 56.8 IN OCTOBER VS 59.6 IN SEPT "
Matthew Graham  :  "RTRS- ISM REPORT ON U.S. NON-MANUFACTURING SECTOR SHOWS PMI AT 55.4 IN OCTOBER (CONSENSUS 54.0) VS 54.4 IN SEPT "
Scott Valins  :  "yikes"
Andy Pada  :  "we will know our daily fate in about 90 seconds"
Jason Anker  :  "on all loans. HERA HOPA"
Jason Anker  :  "yes"
FPH  :  "Do I need to wait 10days from application to close an FHA purchase?"
Matthew Graham  :  "No unequivocal cases to be made for causality. Unless I'm missing something, Rosengren was earlier this morning. A couple standouts since then have been the selling bias in Treasury Futures right at the CME open (almost any time momentum shifts or accelerates around 8:20am, this is potentially the reason), some Draghi wires (not sure anyone cared--they just coincide), and core European debt is still on the ropes (and certainly looking like it's leading Treasuries around to some extent)."
Drexel Hill Mortgage, Inc.  :  "GM why the selloff this morning?"

Read what our user's have to say about MBS Live on LinkedIn.
» Start a two week free trial of MBS Live.