MBS Pricing Snapshot

- Headline PMI 55.2 vs 55.2 consensus
- Business Activity 56.4 vs 59.7 consensus
- New Orders 54.4 vs 58.3 previously
- Employment Index 57.5 vs 55.3 in Dec
- New orders lowest since April, but Employment highest since Feb 2006.

- Comments from survey respondents were generally upbeat as well, perhaps tilting the balance in an otherwise mixed report. Bond markets are in line with their weakest levels of the morning, but we haven't seen a decisive/directional move since the data.

From ISM:
The NMI™ registered 55.2 percent in January, 0.5 percentage point lower than the seasonally adjusted 55.7 percent registered in December. This indicates continued growth at a slightly slower rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 56.4 percent, which is 4.4 percentage points lower than the seasonally adjusted 60.8 percent reported in December, reflecting growth for the 42nd consecutive month. The New Orders Index decreased by 3.9 percentage points to 54.4 percent, and the Employment Index increased 2.2 percentage points to 57.5 percent, indicating growth in employment for the sixth consecutive month. The Prices Index increased 1.9 percentage points to 58 percent, indicating prices increased at a faster rate in January when compared to December. According to the NMI™, eight non-manufacturing industries reported growth in January. Respondents' comments are mixed about the economy and business conditions; however, the majority of respondents are optimistic about the overall direction.

Bond markets are in weaker territory this morning. The simplest and most accurate way to explain this is to say that yesterday was a "risk-off" movement and today has been "risk-on." This was the theme in The Day Ahead, although we'd hoped to see more than just one day of the risk off move.

That said, if we resigned ourselves to following the general swings in equities and European markets amid a lack of domestic data and/or bond-market-specific trading concerns, then we were tacitly agreeing to be at the mercy of equities and European risk markets.

In that sense, the overnight session made a nauseating amount of sense. Asian hours were just about as flat as they could be with less than a 2bp range in 10yr yields and a 3 point range in S&P Futures (after all, yesterday's risk-off move was assigned to Europe in the absence of significant domestic data, so Europe gets to keep carrying that torch).

European data--and there was a good amount--erred on the side of strength last night with stronger services PMIs in both Spain and Germany. Italy's PMI was slightly weaker-than-expected, but that didn't change the takeaway. Peripheral debt moved tighter to German Bunds, themselves moving steadily higher in yield, clearly dragging US Treasuries higher in the process.

Domestic accounts took over in the morning with the first pre-market domestic trade making for a decisive pop over 2% in 10's. This corrected somewhat by 8am, but not so much as to change the broader message, which again, is simply a "risk-on" motion in relatively equal proportion to yesterday's "risk-off."

If anything, we'll take some solace in the face that this less-friendly move is somewhat smaller--i.e. we haven't made it back to Friday's weakest levels. The more disconcerting prospect for today is the the 10am Services PMI is more of a market mover than yesterday's Factory Orders report (which wasn't a market mover at all). If the ISM Non-Manufacturing PMI is in line with the stronger European readings overnight, it merely adds to the risk-off move, likely making it look more like a foil of equal measure to yesterday's recovery.

Even before that, there's the opening bell for stocks. Given the stock-lever connectivity, this could cause volatility for bond markets well in advance of the 10am data. Intraday max supportive ceilings in 10's are at 2.0375. Considering our allusions to wax-on/wax-off, testing 2.0375 would sound like cracking glass.