MBS Pricing Snapshot

- Headline index 22.3 vs 10.0 forecast
- Conditions 58.2 vs 38.9 previously
- New Orders 21.2 vs 5.3 previously
- Employment Index 10.3 vs 3.5
- Market Reaction: Bond markets weaker at first, but holding in a relatively supportive fashion so far.

Manufacturing activity picked up in September, according to firms responding to this month’s Business Outlook Survey. The survey’s broadest indicators for general activity, new orders, shipments, and employment were all positive and higher than in August. The survey's indicators of future activity were significantly higher, suggesting improved optimism about growth over the next six months. Indicators Suggest Expansion

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased from 9.3 in August to 22.3 this month (see Chart). The index has now been positive for four consecutive months and is at its highest reading since March 2011. The percentage of firms reporting increased activity this month (36 percent) was greater than the percentage reporting decreased activity (14 percent).

The demand for manufactured goods, as measured by the current new orders index, increased 16 points, to 21.2. Shipments rebounded from last month: The current shipments index increased 22 points. The diffusion indexes also suggest that, on balance, inventories and deliveries were near steady this month, while unfilled orders increased slightly.

Labor market indicators showed improvement this month. The current employment index increased 7 points, to 10.3, its highest reading since April of last year. The percentage of firms reporting increases in employment (21 percent) exceeded the percentage reporting decreases (10 percent). Firms also reported a longer average workweek compared with last month, and the index increased 15 points, to 12.2.

- 5.48 mln unit annual rate vs 5.25 forecast
- Highest since 2/2007
- Median prices $212,100 + 14.7 pct from last year
- Median price rise is strongest since Oct 2005
- Distressed sales account for lowest percentage of total since records began in 2008.

Existing-home sales increased in August and reached the highest level in six-and-a-half years, while the median price shows nine consecutive months of double-digit year-over-year increases, according to the National Association of Realtors®.

Total existing-home sales1, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, rose 1.7 percent to a seasonally adjusted annual rate of 5.48 million in August from 5.39 million in July, and are 13.2 percent higher than the 4.84 million-unit level in August 2012.

Sales are at the highest pace since February 2007, when they hit 5.79 million, and have remained above year-ago levels for the past 26 months.

Lawrence Yun, NAR chief economist, said the market may be experiencing a temporary peak. “Rising mortgage interest rates pushed more buyers to close deals, but monthly sales are likely to be uneven in the months ahead from several market frictions,” he said. “Tight inventory is limiting choices in many areas, higher mortgage interest rates mean affordability isn’t as favorable as it was, and restrictive mortgage lending standards are keeping some otherwise qualified buyers from completing a purchase.”

Fannie 4.0s are down a quick 2 ticks, now 5 on the day to 103-31+ and 10's are up to 2.73 after stronger than expected data from both Philly Fed and Existing Sales. Looks like there's already some indecision about continuing with the selling trend so it's too soon to tell if it will follow through.

Bond markets were relatively contained overnight, though volume was high as global markets reacted to yesterday's FOMC news. 10yr yields dipped into the 2.67's during Asian hours and moved back up to 2.70's during the hand-off to Europe at 2am.

Yields were as high as 2.712 but began falling heading into the domestic session, ultimately meeting resistance just over 2.69. Morning volatility--unrelated to Jobless Claims, which were basically disregarded--has seen several bounces between those two most recent overnight range boundaries, but we are under relatively more pressure now as stocks open and as econ data approaches.

MBS are holding up a bit better than Treasuries with Fannie 4.0s down only 2 ticks to 104-02 and Fannie 3.5s down 5 ticks to 100-25. The next move may be informed by one or both of the reports out at 10am.

- Claims 309k vs 330k forecast
- Last week revised to 294k from 292k
- None of that may matter because the Labor Department says that two states were still processing a backlog of claims due to the same issue that affected last week's claims--hence the low print today and no major revision to last week. As such, bond markets have essentially tossed out the result and await the 10am data.

In the week ending September 7, the advance figure for seasonally adjusted initial claims was 292,000, a decrease of 31,000 from the previous week's unrevised figure of 323,000. The 4-week moving average was 321,250, a decrease of 7,500 from the previous week's revised average of 328,750.

The advance seasonally adjusted insured unemployment rate was 2.2 percent for the week ending August 31, a decrease of 0.1 percentage point from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending August 31 was 2,871,000, a decrease of 73,000 from the preceding week's revised level of 2,944,000. The 4-week moving average was 2,953,000, a decrease of 24,750 from the preceding week's revised average of 2,977,750.