MBS Pricing Snapshot

* PMI at 56.0 vs 57.0 consensus
* Business Activity 58.9 vs 62.0 consensus
*Employment Index 56.7 vs 55.7 last time

Economic activity in the non-manufacturing sector grew in March for the 27th consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business®.

The report was issued today by Anthony Nieves, C.P.M., CFPM, chair of the Institute for Supply Management™ Non-Manufacturing Business Survey Committee. "The NMI registered 56 percent in March, 1.3 percentage points lower than the 57.3 percent registered in February, and indicating continued growth at a slower rate in the non-manufacturing sector.

The Non-Manufacturing Business Activity Index registered 58.9 percent, which is 3.7 percentage points lower than the 62.6 percent reported in February, reflecting growth for the 32nd consecutive month. The New Orders Index decreased by 2.4 percentage points to 58.8 percent, and the Employment Index increased by 1 percentage point to 56.7 percent, indicating continued growth in employment at a slightly faster rate.

The Prices Index decreased 4.5 percentage points to 63.9 percent, indicating prices increased at a slower rate in March when compared to February. According to the NMI, 16 non-manufacturing industries reported growth in March. Respondents' comments remain mostly optimistic about business conditions. They indicate that increased discretionary spending reflects the increased confidence level of businesses and consumers. There is continued concern about cost pressures and the instability of fuel prices."

Overnight volume was high. Trade desks report strong support out of Asia. In the European session, bond markets continued to firm after a lackluster Spanish debt auction and weak Retail Sales.

Things corrected nominally ahead of the ADP release, but a 209k result vs a 200k consensus was not enough to bolster the selling momentum created by yesterday's FOMC minutes. Volume has been very steady and fairly heavy ever since, easing yields back down to the overnight lows around 2.24% in 10yr yields.

In terms of MBS, Fannie 3.5's are 10 ticks improved today, recapturing the "insult to injury" portion of yesterday's sell-off. This is the lower edge of a small range of prices that have been a fairly significant pivot point for MBS from 102-16 to 102-19.

It's not all sunshine and lollipops though. Simply being a reasonable distance into the green this morning isn't saying much on the heels of an 'as-expected' ADP, not to mention the weaker European session. With FOMC minutes out of the way, markets are free to pay that much more attention to economic data. To that end, NFP is the next biggie, but we wouldn't rule out some reaction to this morning's upcoming ISM Non-Manufacturing data. More so than usual, markets might be interested in the employment component of that report.

We effectively just go the message from the Fed that further stimulus is going to be an "as-needed" sort of thing. Some might buy into that suggestion in different amounts, but to whatever extent you do, you then become very interested in reports like NFP to tell you how "needed" stimulus might be down the road. This morning's ADP, and to a lesser extent, the ISM Non-Mfg numbers could help shape expectations for Friday.

According to today’s ADP National Employment Report, employment in the nonfarm private business sector rose 209,000 from February to March on a seasonally adjusted basis. Employment in the private, service-providing sector increased 164,000 in March, after rising a revised 183,000 in February. Employment in the private, goods-producing sector rose 45,000 in March. Manufacturing employment increased 23,000, while construction employment advanced 13,000 and the financial services sector added 8,000 jobs during that period.

“During the first quarter of this year, monthly gains in employment shown in The ADP National Employment Report averaged 207,000 jobs, compared to 156,000 per month over all of 2011,” said Carlos Rodriguez, President and CEO of ADP. “This is a positive development, and I would hope that job growth will be even more robust for the remainder of the year.”

According to Joel Prakken, Chairman of Macroeconomic Advisers, LLC, “Labor market conditions continue to improve at a moderate pace. Employment grew in all the major sectors of the economy tracked in The Report, and across payrolls of all sizes. Today’s data marks the twenty-sixth consecutive monthly gain in private employment as measured in The Report.

“The March increase in private employment suggests that the national unemployment rate may have declined slightly last month. It would also be consistent with other indicators suggesting some firming of labor market conditions, such as the downward trend in unemployment claims and upturns in the components of consumer sentiment and confidence influenced by perceptions about the availability of jobs.”

Prakken added: “Employment on medium payrolls—those with 50 to 499 workers—rose 87,000 in March. Employment on large payrolls—those with 500 or more workers—increased 22,000 during that same period.” The