MBS Pricing Snapshot

- Philly Fed Business Conditions -5.8 vs +5.8 Consensus
- 6 Month Outlook ROSE to 29.2 vs 23.7 previously

- New orders -4.3 vs +4.9 in Dec
- Employment Index -5.2 vs -0.2 in Dec

The January Business Outlook Survey suggests that activity in the region’s manufacturing sector decreased moderately this month. Firms reported decreases in overall activity, new orders, and employment this month. Firms also reported a moderation in price pressures compared with the previous month. The survey’s future activity indexes suggest that firms expect growth over the first six months of 2013.

Good morning, and welcome to a relatively big, unexpected sell-off for bond markets. We're expecting a lot of questions about why things are happening the way they are this morning, so let's get right to the simplest explanation we can muster.

Remember earlier in the week when the Japanese Yen was mentioned in the context of US Bond Markets for the first time in a long time? Essentially, the domestic bond market rally was being helped along by Japan's ostensibly aggressive moves to devalue the Yen in order to support export growth and prevent deflation. A lower yen typically coincides with lower Treasury yields.

On Tuesday Japan's Economy Minister Amari threw a bit of cold water on the perception of a rampantly weakening Yen, but this morning has said that a weaker yen shouldn't be much of an issue until it his 100.0. It was trading as low as 88 yesterday and it now up to 89.44 following thos comments.

Amari's comments along only account for a portion of that movement however. They were most damaging as the catalyst for a snowball in European markets leading toward higher rates. That merely started the snowball rolling. Europe gave it a bigger push.

Rumors that the ECB is considering tighter collateral requirements, which sparked concerns about paybacks on the ECB's LTRO's (Long term refinancing operations) at the end of the month. Think of that like a "reverse QE." Just like when the Fed pumps money into the system to lower interest rates and encourage lending, if European banks are pumping money back out of the system (by paying more of it back to the ECB), the implication is for higher rates.

German Bunds moved from 1.47 to 1.55 by 6am New York time. That's a big move! Treasuries were following in relative lock-step, but as is typical during European hours, the movements in Treasuries were an order of magnitude smaller than Bunds, moving up only 5.5 bps vs the 8bp move in Bunds.

That was cause for celebration as it seemed that the massive, unexpected overnight weakness was already in the process of bouncing off a ceiling at 1.86%. Fannie 3.0 MBS had opened at 104-10--a supportive floor earlier in the week--and were hoping to hold there, or close to it. Domestic bond markets were certainly on the back foot, but with some hope of a bounce back with the help of cooperative data.

Data didn't cooperate...

It's hard to say which 8:30am headline had more impact on bond markets because both of them were significantly stronger than expected. The drop in Jobless Claims since 2008 and the highest unit rate of Housing Starts since 2008, both on the same morning at the same minute. That's quite the sucker punch after being forced higher by an unexpected, headline-inspired snowball sell-off overnight, not surprisingly leading to the biggest minute of volume since NFP on January 4th, contributing to the 2nd biggest hour of volume since then (only lagging last Thursday's ECB announcement/press conference).

The move is disconcerting in the sense that introduces the potential for a bounce off longer term trendlines in Treasuries. That said, we've been holding some ground near the current 1.87 levels, which could ultimately look like a supportive ceiling/pivot tracing back through Jan 8th, 9th, and 14th. Too, we mentioned 104-03 in this morning's chart as a longer-term "modal" support level for Fannie 3.0s. That's exactly where we bounced on this morning's sell-off and MBS have since come back a few ticks to 104-07.

Bottom lines: this is a bit scary so far this morning, but there are glimmers of hope that it's not necessarily the end of the world. Stepping back a few more feet and this morning's thoughts on "sideways-ness" are probably right on:

"Really, it's less to do with trying to divine whether or not rates are about to explode higher or lower, and more to do with deciding on sideline seat for sideways parade heading into the sideshow of political headlines surrounding the debt ceiling debate. "

In other words, regardless of any near term, moderate moves higher or lower, the overriding theme is sideways for the broader range. We'd have to be breaking above 1.92 in 10yr Treasuries (and convincingly) to really change that. As for the rest of the day: waiting and seeing.... hoping for ongoing moderation from morning weakness to confirm broader sideways trend.

- Starts +12.1 pct vs -4.3 in Nov
- +954k unit rate, Highest since June 2008 (consensus 890k)
- Housing Permits 903k, as expected



BUILDING PERMITS
Privately-owned housing units authorized by building permits in December were at a seasonally adjusted annual rate of 903,000. This is 0.3 percent (±1.0%)* above the revised November rate of 900,000 and is 28.8 percent (±1.4%) above the December 2011 estimate of 701,000.

Single-family authorizations in December were at a rate of 578,000; this is 1.8 percent (±1.0%) above the revised November figure of 568,000.

Authorizations of units in buildings with five units or more were at a rate of 301,000 in December. An estimated 813,400 housing units were authorized by building permits in 2012. This is 30.3 percent (±1.1%) above the 2011 figure of 624,100.

HOUSING STARTS
Privately-owned housing starts in December were at a seasonally adjusted annual rate of 954,000. This is 12.1 percent (±13.4%)* above the revised November estimate of 851,000 and is 36.9 percent (±22.0%) above the December 2011 rate of 697,000.

Single-family housing starts in December were at a rate of 616,000; this is 8.1 percent (±9.7%)* above the revised November figure of 570,000. The December rate for units in buildings with five units or more was 330,000.

An estimated 780,000 housing units were started in 2012. This is 28.1 percent (±2.6%) above the 2011 figure of 608,800

- Claims 335k vs 365k Consensus
- 4 week average fell to 359.25k vs 366k previously
- Claims lowest since jan 2008, 37k drop biggest since Feb 2010

In the week ending January 12, the advance figure for seasonally adjusted initial claims was 335,000, a decrease of 37,000 from the previous week's revised figure of 372,000. The 4-week moving average was 359,250, a decrease of 6,750 from the previous week's revised average of 366,000.

The advance seasonally adjusted insured unemployment rate was 2.5 percent for the week ending January 5, an increase of 0.1 percentage point from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending January 5 was 3,214,000, an increase of 87,000 from the preceding week's revised level of 3,127,000. The 4-week moving average was 3,195,750, a decrease of 6,000 from the preceding week's revised average of 3,201,750.