MBS Pricing Snapshot

If we weren't trading at the lowest 10yr yields since February or very near the highest MBS prices, we might see bond markets slightly more willing to take bullish cues from domestic stock market weakness and plummeting European Benchmark Debt. German Bunds are once again knocking on the floor at 1.60%, and while their strength helped in the overnight session, domestic markets are showing some signs that they're getting a bit tired in the current rally.

Weaker-than-expected ADP helped Treasuries and MBS ratchet into slightly better territory, but as previously mentioned, both markets hit resistance levels precisely in line with yesterday's limits, and haven't been back for another test. Stocks on the other hand are leaking very slightly weaker.

Fannie 3.5 resistance is at 103-29 and 10yr yields at 1.90. We wouldn't rule out the possibility of ratcheting to slightly better levels, but also have an eye on 103-26 support as sort of a line in the sand that could suggest some level of deterioration. Even then, if we weren't breaking below 103-22 and falling, we'd still be in an acceptably narrow range ahead of Friday's NFP. It should be noted that approaching such levels could result in reprices later on, but we haven't seen any indication that will happen yet.

New orders for manufactured goods in March, down two of the last three months, decreased $7.1 billion or 1.5 percent to $460.5 billion, the U.S. Census Bureau reported today. This followed a 1.1 percent February increase. Excluding transportation, new orders increased slightly.

Shipments, up ten consecutive months, increased $3.3 billion or 0.7 percent to $466.2 billion. This followed a 0.1 percent February increase.

Unfilled orders, up twenty-three of the last twenty-four months, increased $0.5 billion or 0.1 percent to $930.6 billion. This followed a 1.2 percent February increase. The unfilled orders-to-shipments ratio was 6.17, down from 6.24 in February.

Inventories, up twenty-nine of the last thirty months, increased $1.9 billion or 0.3 percent to $618.4 billion. This was at the highest level since the series was first published on a NAICS basis in 1992 and followed a 0.3 percent February increase. The inventories-to-shipments ratio was 1.33, unchanged from February.

The unseen hand is conducting a symphony of market movement at the moment. Just like a conductor's baton can cue several sections of different instruments to hit the same notes at the same time in the same way, so too have disparate markets joined together in perfectly mirroring each others' movements this morning.

In plainer English, stocks, bonds, and MBS all moved in their expected directions following the weaker-than-expected ADP (stocks down, bond yields down, MBS prices up). Then, all three of those markets bounced precisely at yesterday's lows/highs. For MBS, that was a perfect bounce at yesterday's 103-29 high. 10yr yields uncannily hit 1.8997 yesterday and again this morning, right down the that 4th decimal! S&P futures weren't quite as precise, hitting 1392.25 vs y'day's 1392.00.

The fact that all of these range-limit revisits occurred immediately before the ISM data makes the whole affair look that much more choreographed. That's not to say that anything has been staged, but rather that markets seemed to already have the script for how they would react given a certain set of directions.

The rest of today's production is less certain. At 103-27 in Fannie 3.5 MBS, we're not yet threatening to retest this morning's (and y'day's of course) ceiling, but remain 4 ticks improved on the day. 10's are in a similar spot: noticeably improved from yesterday but at 1.9102, not quite back to the two day floor. So we'll stick with the theme of the first four days of the week having some measure of entitlement to move things around but with bigger moves reserved for Friday's NFP. In other words, either we've already seen the strongest levels of the day and will retreat to the more central portions of the recent range, or we'll merely ratchet into slightly stronger territory.

Factory Orders are up next at 10am, expected to fall 1.5 percent after last month's rise of 1.3 pct.

According to today’s ADP National Employment Report, employment in the nonfarm private business sector rose 119,000 from March to April on a seasonally adjusted basis. Employment in the private, service-providing sector rose 123,000 in April, after rising 158,000 in March.

Employment in the private, goods-producing sector declined 4,000 in April. Manufacturing employment declined by 5,000, the first drop since September of last year. Construction employment also fell by 5,000, the first loss in seven months and following healthy gains during the unusually warm winter months. The financial services sector added 13,000 from March to April.

“According to data shown in the ADP National Employment Report, monthly employment gains averaged just over 200,000 during the first quarter of this year,” said Carlos Rodriguez, President and CEO of ADP. “This month’s modest increase of 119,000 jobs appears consistent with the first-quarter Gross Domestic Product growth of 2.2 percent.

We hope future rates of job creation will be more aggressive and sustained,” Rodriguez added. According to Joel Prakken, Chairman of Macroeconomic Advisers, LLC, “While April’s increase was the twenty-seventh consecutive monthly advance, it nonetheless reflected a deceleration in the recent pace of hiring. This deceleration seems consistent with other incoming data, including a disappointingly weak report on first-quarter Gross Domestic Product, a recent back-up in initial unemployment claims, and last month’s relatively weak reading on establishment employment reported by the Bureau of Labor Statistics.”

Prakken added: “There is some evidence that unusually warm weather boosted employment during the winter months, with a “payback” now coming due. The modest rise in private employment suggests that the national unemployment rate probably did not decline in April unless there was a notable decline in the labor force.”