MBS Pricing Snapshot

U.S. house prices rose 0.8 percent on a seasonally adjusted basis from April to May, according to the Federal Housing Finance Agency’s monthly House Price Index. The previously reported 0.8 percent increase in April was revised downward to a 0.7 percent increase. For the 12 months ending in May of 2012, U.S. prices rose 3.7 percent. The U.S. index is 17.0 percent below its April 2007 peak and is roughly the same as the May 2004 index level.

The FHFA monthly index is calculated using purchase prices of houses with mortgages that have been sold to or guaranteed by Fannie Mae or Freddie Mac. For the nine census divisions, seasonally adjusted monthly price changes from April to May 2012 ranged from -1.0 percent in the West South Central division to +1.7 percent in the Pacific division.

The news of the day actually arrived after hours yesterday as Moody's fired a warning shot across Germany's bow. Moody's changed its outlook for Germany to negative citing the twofold risks of general Euro zone contagion and more importantly Germany's central role in bearing the burden of financial support to struggling peripheral countries.

Although this might seem like a logical evolution of the EU crisis, it was a shock to German bond markets overnight. After already having bounced off all-time lows of 1.13 up to 1.18, the ratings action ushered yields abruptly to 1.27. Needless to say, a nearly 15bp swing in less than 24 hours is pretty swift, and one that we're thankful we're not seeing at home (1.4 to 1.54%? No thanks).

Instead, 10yr Treasuries merely moved higher at a measured pace overnight to open slightly weaker. They currently trade at 1.457. MBS continue to hold their ground well versus Treasuries, down 4 ticks in Fannie 3.0's at 104-02. Stock futures are roughly in line with yesterday's closing levels as we await the cash open presently.

After that, there's limited economic data for the rest of the day including Richmond Fed index and FHFA Home Prices. The Fed is in again buying for "twisty" purposes from 10:15-11:00am and the not-at-all-interesting 2yr Note Auction happens at 1pm.

Key points:

• PMI at second-lowest level since the sub-50 readings in 2008-09
• ƒ Growth of both output and new orders slowest in a year
• ƒ Employment increases at steady rate ƒ Input costs fall at sharpest rate since June 2009

The July Markit Flash U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) indicated the weakest improvement in U.S. manufacturing sector business conditions in 19 months, according to the preliminary ‘flash’ reading which is based on around 85% of usual monthly replies. At 51.8, down from 52.5 in June, the headline index was the second-lowest since the manufacturing recovery was first signalled by the PMI in late-2009 (only December 2010 saw a weaker PMI reading).