Following yesterday's weaker-than-expected Chicago PMI report, markets were geared up for a similarly disappointing national figures in today's ISM Manufacturing Report.  Even then, there seemed to be some hesitation to rally too much yesterday, given the stronger employment component of Chicago PMI on a week that concludes with a hugely important Employment report. But not only was the employment component of today's ISM report higher than last time, but the headline PMI ("purchasing management index") surprised to the upside as well, sending a relative shockwave through both equities and bond markets.  The key word here is "relative," as the weakness isn't anything too disturbing in the slightly bigger picture as 1.95-1.96% in 10yr Treasuries is a well-travelled pivot point.  In other words, nothing much is changing unless 10's are over 1.96% and rising.  Translated to MBS, we'd note a pivot point around 103-22.  So far, these seem to be holding as support levels.

MBS Pricing Snapshot

After yesterday's Chicago PMI surprised markets with a much weaker-than-expected reading, today's national figures from the ISM were widely expected to show similar deceleration. Even if they did, it was possible that a stronger employment component could keep bond markets from rallying further given that this is NFP week.

But not only did today's ISM report offer that slightly improved Employment component, but the headline itself surprised to the upside, 54.8 vs 53.0 consensus. This 'double negative' for bond markets has Fannie 3.5's down to 103-24 from 103-29, enough for a negative reprice from lenders who were already out with prices this morning. 10yr Yields are up 1.5 bps now to 1.9348. Further weakness is possible, but we'd also point out that the damage on the charts LOOKS a bit worse than it is due to the recently narrow range.

The U.S. Census Bureau of the Department of Commerce announced today that construction spending during March 2012 was estimated at a seasonally adjusted annual rate of $808.1 billion, 0.1 percent (±1.4%)* above the revised February estimate of $807.3 billion. The March figure is 6.0 percent (±1.9%) above the March 2011 estimate of $762.6 billion.

During the first 3 months of this year, construction spending amounted to $171.2 billion, 6.7 percent (±1.6%) above the $160.4 billion for the same period in 2011.

Spending on private construction was at a seasonally adjusted annual rate of $531.9 billion, 0.7 percent (±1.3%)* above the revised February estimate of $528.1 billion. Residential construction was at a seasonally adjusted annual rate of $244.1 billion in March, 0.7 percent (±1.3%)* above the revised February estimate of $242.5 billion. Nonresidential construction was at a seasonally adjusted annual rate of $287.8 billion in March, 0.7 percent (±1.3%)* above the revised February estimate of $285.7 billion.

In March, the estimated seasonally adjusted annual rate of public construction spending was $276.2 billion, 1.1 percent (±2.2%)* below the revised February estimate of $279.1 billion. Educational construction was at a seasonally adjusted annual rate of $69.1 billion, 1.2 percent (±3.5%)* below the revised February estimate of $70.0 billion. Highway construction was at a seasonally adjusted annual rate of $77.0 billion, 0.8 percent (±7.7%)* below the revised February estimate of $77.6 billion.

* PMI at 54.8 vs 53.0 Consensus, 53.4 previous
* Employment index 57.3 vs 56.1 previous
* both of the above metrics highest since June 2011

"The PMI registered 54.8 percent, an increase of 1.4 percentage points from March's reading of 53.4 percent, indicating expansion in the manufacturing sector for the 33rd consecutive month. Sixteen of the 18 industries reflected overall growth in April, and the New Orders, Production and Employment Indexes all increased, indicating growth at faster rates than in March. The Prices Index for raw materials remained at 61 percent in April, the same rate as reported in March. Comments from the panel generally indicate stable to strong demand, with some concerns cited over increasing oil prices and European stability."

Volume and volatility in the overnight and early domestic sessions feels like that of a Friday after Thanksgiving. To say "you could hear a pin drop," would be take on a whole new meaning as you could actually hear the sound of the pin falling through the air.

Apart from the general flying of holding patterns in the lead up to Friday's Employment Situation report, large percentages of foreign market participants continue to out for various holidays. Most notable this morning is that all of Europe, except the UK, is out for May Day.

The little volume we've seen, has resulted in flat to slightly stronger bond markets. 10yr TSYs are about 1bp better at 1.91 and Fannie 3.5 MBS a tick higher at 103-28. Equities futures are flat. All of this 'flatness' MIGHT get a push in one direction or another with the 10am ISM Manufacturing data. Factory Orders hit at the same time, followed shortly by scheduled Fed Twist buying in the 8-10yr range. There's a bit more discussion on the ISM data in "The Day Ahead:"