MBS Pricing Snapshot

- Construction Spending -0.3 vs +0.6 Consensus
- First negative reading since March
- Private Residential Construction Spending +0.4 to $295.3 bln, most since late 2008

The U.S. Census Bureau of the Department of Commerce announced today that construction spending during November 2012 was estimated at a seasonally adjusted annual rate of $866.0 billion, 0.3 percent (±1.6%)* below the revised October estimate of $868.2 billion. The November figure is 7.7 percent (±2.0%) above the November 2011 estimate of $804.0 billion.

During the first 11 months of this year, construction spending amounted to $781.4 billion, 9.2 percent (±1.3%) above the $715.4 billion for the same perio
d in 2011.

PRIVATE CONSTRUCTION
Spending on private construction was at a seasonally adjusted annual rate of $589.8 billion, 0.2 percent (±1.3%)* below the revised October estimate of $590.8 billion. Residential construction was at a seasonally adjusted annual rate of $295.3 billion in November, 0.4 percent (±1.3%)* above the revised October estimate of $294.2 billion. Nonresidential construction was at a seasonally adjusted annual rate of $294.5 billion in November, 0.7 percent (±1.3%)* below the revised October estimate of $296.5 billion.

PUBLIC CONSTRUCTION
In November, the estimated seasonally adjusted annual rate of public construction spending was $276.2 billion, 0.4 percent (±2.3%)* below the revised October estimate of $277.4 billion. Educational construction was at a seasonally adjusted annual rate of $66.8 billion, nearly the same as (±3.5%)* the revised October estimate of $66.8 billion. Highway construction was at a seasonally adjusted annual rate of $77.8 billion, 0.5 percent (±5.3%)* above the revised October estimate of $77.4 billion.

- ISM Manufacturing PMI 50.7 vs 50.3 forecast, 49.5 previously
- Prices Paid: 55.5 vs 51.5 forecast, 52.5 previously
- Employment Index 52.7 vs 48.4 previously
- Employment Index highest since September

From ISM:
Manufacturing expanded in December as the PMI registered 50.7 percent, an increase of 1.2 percentage points when compared to November's reading of 49.5 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

A PMI™ in excess of 42.6 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the December PMI™ indicates growth for the 43rd consecutive month in the overall economy, and indicates expansion in the manufacturing sector. Over the last six months of 2012, manufacturing registered expansion in three months and contraction in three months, moving back and forth across the 50 percent mark. Holcomb stated, "The past relationship between the PMI™ and the overall economy indicates that the average PMI™ for January through December (51.7 percent) corresponds to a 3.1 percent increase in real gross domestic product (GDP). In addition, if the PMI™ for December (50.7 percent) is annualized, it corresponds to a 2.7 percent increase in real GDP annually."

At the apex of the December's biggest Cliff-related sell-off, 10yr yields backed up to 1.85 and our longer term charts noted a 1.865 retracement level. This was MND's take on the morning following that relatively disconcerting sell-off:

"Even if yields can simply hold sideways, as long as they bounce back lower BEFORE a Cliff deal is imminent, it leaves room for current weakness to be construed as a "surprise inspection of the range." This, in itself, would leave room for that recently explored range boundary to have a shot at being a supportive ceiling against any post-Cliff-deal sell-offs."

In other words, the fact that 10yr yields have topped out at 1.860 this morning is a promising sign and perhaps even a little boring (not wanting to tempt fate here, but a post-cliff sell-off to anything near 1.85 was definitely on one of the first few pages of bond markets' play book).

The motivations for the sell-off have more to do with the fact that "something" was accomplished as opposed to utter and complete political gridlock preventing any attempts to avoid the Cliff. Certainly, last night's deal isn't any sort of epic solution to the underlying problems--no "grand bargain"--but it does fulfill the "something is better than nothing requirement.

Pent up knee-jerk reactions are also feeding into this a bit with much of the market closed in the overnight session, and the US holiday keeping domestic securities trading off line until 230am for cash Treasuries and 6am for rates/equities futures this morning. That means that London didn't even trade US stock futures until 11am GMT. While Treasuries yields were already fairly well adjusted by 6am, there was another moderate grind higher as domestic activity ramped up with 10's topping out at 1.860 precisely at 8:48am.

MBS opened roughly 10 ticks weaker than Monday's latest levels at 104-16 and moved a few ticks lower before finding their footing at 104-13. After 10's confirmed the 1.860 bounce, MBS noticeably improved, but met overhead resistance at 104-20 before settling in for a sideways grind between there and 104-18 for the past hour.

The rest of the day is characterized by hopes and dreams that the 1.860 ceiling holds firm in 10yr yields. This would be a unbelievably boring and uneventful outcome for the Fiscal Cliff quasi-deal signed late last night. To be sure, even if we break higher, the generally less-than-triumphant structure of the deal should serve to keep the lid on excessively painful sell-offs, but unfortunately, those possibilities are out there to some extent.

If data is to be of any concern to markets today, we'll know in 1 minute when ISM Manufacturing hits. Otherwise, we're very much in "watch and react" mode as we watch markets continue to react to the Cliff deal. So far... holding ground in weaker, but unsurprising (and perhaps even "promising") territory. Let's hope that continues to be the case.

- PMI 54.0 vs 54.2 preliminary , 52.8 November Final
- PMI highest since May on Final basis.
- Employment Index highest since April

The final Markit U.S. Manufacturing Purchasing Managers’ Index was 54.0 in December, down slightly from the flash estimate of 54.2, and signalled a further expansion of the U.S. manufacturing sector. Moreover, up from 52.8 in November, the headline PMI indicated the strongest rate of growth since May.

PMI index readings above 50.0 signal an increase or improvement on the prior month, while readings below 50.0 indicate a decrease. Manufacturing output increased at the strongest rate in seven months during December.

The rate of growth was solid, albeit weaker than that previously estimated by flash PMI data. All three market groups saw higher levels of production, with manufacturers of intermediate goods posting the strongest rate of increase overall.