MBS Pricing Snapshot

- Factory Orders -4.0 vs -2.6 consensus
- Excluding Transportation -2.0 vs -0.7 previously
- Computers/Electronics orders +0.5 vs -2.5 previously

- Market Reaction: Same boat at ISM, but a less significant report. Not much of an impact, and not enough of a miss to reverse losses for bond markets.

New orders for manufactured durable goods in March decreased $13.1 billion or 5.7 percent to $216.3 billion, the U.S. Census Bureau announced today. This decrease, down two of the last three months, followed a 4.3 percent February increase. Excluding transportation, new orders decreased 1.4 percent. Excluding defense, new orders decreased 4.7 percent.

Transportation equipment, also down two of the last three months, led the decrease, $11.0 billion or 15.0 percent to $62.4 billion. This was led by nondefense aircraft and parts, which decreased $8.5 billion.

- Headline index 53.1 vs 54.0 consensus
- Business Activity 55.0 vs 56.0 consensus
- New orders roughly unchanged
- Employment 52.0 vs 53.3
- Prices 51.2 vs 55.9
- headline index lowest since July
- Activity index and Prices lowest since June
- Employment lowest since Nov

- Market Reaction: Treasuries/MBS slightly weaker after the report. Even though it was weaker than expected, markets may have been hoping for more in order to stem the tide of losses.

The NMI™ registered 53.1 percent in April, 1.3 percentage points lower than the 54.4 percent registered in March. This indicates continued growth at a slightly slower rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 55 percent, which is 1.5 percentage points lower than the 56.5 percent reported in March, reflecting growth for the 45th consecutive month. The New Orders Index decreased by 0.1 percentage point to 54.5 percent, and the Employment Index decreased 1.3 percentage points to 52 percent, indicating growth in employment for the ninth consecutive month. The Prices Index decreased 4.7 percentage points to 51.2 percent, indicating prices increased at a slower rate in April when compared to March. According to the NMI™, 14 non-manufacturing industries reported growth in April. Respondents' comments remain mostly positive about business conditions. Cost management and revenue pressures are areas of concern for many of the respective companies.

Perhaps bond markets were "holding out" to some extent--waiting to see if the 10am data would offer a helping hand against the post-NFP weakness. Indeed the data was weaker than expected, but not weak enough to allow for continued ground-holding in Treasuries/MBS.

10's are up to 1.726, hitting 1.73 briefly and Fannie 3.0s hit 104-03, remaining there currently. The early rate sheets are likely conservative enough that we can weather these losses if we hold here. Any move lower puts them at risk for negative reprices, however.

Looking forward to the rest of the day, It's safer to assume that the trajectory of losses from 8:35am to present will continue until proven otherwise.

If current levels are any indication, bond markets did a surprisingly good job of getting to where the needed to go following NFP. 10's continue flirting with 1.70 and Fannie 3.0s are still holding the 104-07 to 104-10 range. This is relatively excellent if it turns out to be "support" heading into the rest of the day, but such instances of support can sometimes merely be "flags" of consolidation before the initial move extends.

Zooming out on the 10yr chart we see an April range of 1.83 to 1.68 prevailed for most of the month before the first vestiges of the NFP "lead off" began at the end of the month. The most striking technical development over that time was the super narrow, super regular range bind lasting from 4/12 to 4/26.

Yields were locked between 1.68 and 1.733 during that time and current levels take us essentially into the middle of that range. When we saw how sideways and how regular that area turned out to be, and when we considered it in the historical context of the epic bounce off 1.674 back in 2011, it felt like this might be where we'd see the next shift in the long term range that had just rallied from nearly 2.10%! It would necessarily be a "bad thing" to pause for reflection after a 40bp directional rally.

At this point, a break below 1.675 would show some more resolve to break the choppy long term uptrend stretching back to July 2012, but a marked break above 1.733 would be one potential warning of a broader bounce back with 1.82-1.85 being the next bad of supportive yields.

MBS are in a very similar short term situation where prices have returned to the center their own range-bind that coincided with the 1.675-1.733 epoch of Treasury trading. For MBS it was 104-02 to 104-12. With prices currently at 104-07, we're smack dab in the middle.

Is this indecision? Resolve? Or merely consolidation? All valid questions, but they may not be possible to answer simply with today's reaction. The ISM Non-Manufacturing data suddenly becomes a bit more relevant assuming we make it to 10am with this ostensibly indecisive ground-holding in bond markets.

The PMI is seen at 54.0 vs 54.4 previously, and anything above that could tilt the scales enough to allow the bounce to extend a bit more. Whether or not it challenges the short term limits (1.733 in 10's or 104-02 in MBS) is less certain, but it should at least send us closer to one end of those recent ranges.

That said, keep in mind that this is an extremely bearish situation for bond markets in a historical context. Entire months of momentum in bonds, more often than not, follow the implication set by NFP at the beginning of the month. Two factors make that correlation stronger. The first factor is whether or not NFP falls at the end of prolonged move. In those cases, a contrary NFP almost always marks a bounce. The second factor is the size of the beat or miss of the report itself. In today's case, that's arguably not very big on the headline (165k vs 145k), but considering the revisions to previous months, and the defensive stance that got us to these levels, the size is perhaps a bit bigger than it looks on the surface.

Keep that in mind this afternoon, even when you're looking at crappier rate sheets, wondering if you'll get a bit back next week. It's historically less safe to assume that you will.

- Payrolls 165k vs 145k
- March revised from 88k to 138k
- February revised from 268k to 332k
- U/E rate 7.5 pct, lowest since Dec 2008
- Labor Force Participation Rate 63.3, unchanged

Market reaction: 10's are tap-dancing around 1.70 while Fannie 3.0s are down 15 ticks at 104-07. S&P futures are up 12 points.

Total nonfarm payroll employment increased by 165,000 in April, with job gains in professional and business services, food services and drinking places, retail trade, and health care. Over the prior 12 months, employment growth averaged 169,000 per month.

The unemployment rate, at 7.5 percent, changed little in April but has declined by 0.4 percentage point since January. The number of unemployed persons, at 11.7 million, was also little changed over the month; however, unemployment has decreased by 673,000 since January.

165k vs 145k consensus, last month revised to 138 from 88k previously, Feb revised to a ridiculously high 332k from 268k.

Bond markets tanking instantly to 1.69 in 10yr yields. MBS down to 104-10.

More to follow...