MBS Pricing Snapshot

- Spending down 0.6 pct vs +0.5 pct consensus
- Both public and private spending fell, making for the largest decline since July 2011
- Markets were too preoccupied with the ISM numbers to react much to this report.

The U.S. Census Bureau of the Department of Commerce announced today that construction spending during August 2012 was estimated at a seasonally adjusted annual rate of $837.1 billion, 0.6 percent (±2.1%)* below the revised July estimate of $842.0 billion. The August figure is 6.5 percent (±2.1%) above the August 2011 estimate of $786.3 billion.

During the first 8 months of this year, construction spending amounted to $545.2 billion, 9.0 percent (±1.5%) above the $500.1 billion for the same period in 2011.

PRIVATE CONSTRUCTION: Spending on private construction was at a seasonally adjusted annual rate of $562.2 billion, 0.5 percent (±1.2%)* below the revised July estimate of $564.8 billion. Residential construction was at a seasonally adjusted annual rate of $273.5 billion in August, 0.9 percent (±1.3%)* above the revised July estimate of $271.1 billion. Nonresidential construction was at a seasonally adjusted annual rate of $288.7 billion in August, 1.7 percent (±1.2%) below the revised July estimate of $293.7 billion.

PUBLIC CONSTRUCTION: In August, the estimated seasonally adjusted annual rate of public construction spending was $274.9 billion, 0.8 percent (±3.3%)* below the revised July estimate of $277.2 billion. Educational construction was at a seasonally adjusted annual rate of $67.0 billion, 3.4 percent (±6.3%)* below the revised July estimate of $69.4 billion. Highway construction was at a seasonally adjusted annual rate of $80.8 billion, 0.6 percent (±6.9%)* below the revised July estimate of $81.3 billion.

A "risk-on" move favors stock prices and is generally negative for bond markets. As risk-free benchmarks, Treasuries take a bigger hit than MBS during such moves and that is the case currently as bond markets are under pressure from stronger ISM numbers.

Pundits may discuss a number of things here, including the fact that ISM crossed the magical 50.0 mark in new orders and business activity, but at least equally important is the improvement in the EMPLOYMENT component of the report. With NFP on Friday and traders very cognizant of a lousy track record for bond markets in October, this is a potential warning sign for bigger moves later in the weak.

While 10yr yields turned negative on the news, moving to the mid 1.64's, MBS are still in the green, holding onto the low 105-20's in Fannie 3.0s, which is 5-6 ticks higher on the day. All in all, the reaction looks to be contained for now, but if the upcoming employment anecdotes tomorrow through Thursday are similarly stronger, it will apply increasing pressure.

- PMI 55.5 vs 54.0 Consensus
- New Orders turn positive, 52.3 vs 47.1 last time
- Employment Index 54.7 vs 51.6

The PMI™ registered 51.5 percent, an increase of 1.9 percentage points from August's reading of 49.6 percent, indicating a return to expansion after contracting for three consecutive months. The New Orders Index registered 52.3 percent, an increase of 5.2 percentage points from August, indicating growth in new orders after three consecutive months of contraction. The Production Index registered 49.5 percent, an increase of 2.3 percentage points and indicating contraction in production for the second time since May 2009. The Employment Index increased by 3.1 percentage points, registering 54.7 percent. The Prices Index increased 4 percentage points from its August reading to 58 percent. Comments from the panel reflect a mix of optimism over new orders beginning to pick up, and continued concern over soft global business conditions and an unsettled political environment.

The first part of the overnight session was quieter than normal with China our for it's annual week of holidays. Things got choppy at the European open after Spain's PMI showed a notable improvement in September, adding on to the Spanish cheering section after Friday's news that they might not need as much bailout cash as the Euro Zone had been prepared to give.

Treasuries and Bunds sold off, mostly on the Spanish data, but it's also notable that more than half of the countries covered by Markit's PMIs improved vs last month. Germany, France, and Italy all remained below the watermark for expansion.

Markit's US PMI was slightly weaker than expected, but remained above the 50.0 expansion/contraction mark. Markets haven't reacted much to that data with Treasuries mostly between 1.62 and 1.63 so far this morning, but with a slightly bearish tilt.

MBS opened in line with Friday's close and have added a few ticks since then with Fannie 3.0s up 5/32nds to 105-21. 10yr yields are approaching their highest yields of the morning at 1.632 vs a high of 1.634.

Next up is the ISM PMI at 10am, seen at 49.7 vs 49.6 previously, as well as Construction Spending. Of these two reports, ISM is traditionally the bigger market mover. There will be scheduled Fed Twist buying from 10:15-11:00am and 2 Fed speakers in the afternoon, including Bernanke at 12:30.

- Lowest PMI reading since September 2009
- Marginal rise in manufacturing output
- Job creation weakest since December 2010
- Input price inflation strengthens

The final Markit U.S. Manufacturing Purchasing Managers’ Index™ (PMI™)1 fell to its lowest level for three years in September. At 51.1, down from 51.5 in August and lower than the earlier flash estimate, the PMI was consistent with only a modest expansion of the U.S. manufacturing sector.

PMI index readings above 50.0 signal an increase or improvement on the prior month, while readings below 50.0 indicate a decrease.