MBS Pricing Snapshot

- Index +41 vs +41 Consensus (Was +40 in Sept)

Builder confidence in the market for newly built, single-family homes edged slightly higher for a sixth consecutive month in October, according to the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today. The latest, one-point gain brings the index to 41, its strongest level since June of 2006.

“Many builders are reporting increases in the number of serious buyers visiting their sales offices, and the overall confidence measure is much higher than it was at this time last year,” noted NAHB Chairman Barry Rutenberg, a home builder from Gainesville, Fla. “The concern is that, even though demand for new homes is rising, overly tight credit conditions are still constraining new building and new purchases at a time when that kind of economic activity and the job growth it generates are greatly needed.”

“The slight gain in builder confidence this month is an indication that, while still moving forward, the speed at which the housing recovery is proceeding is being moderated by the various constraints such as tight credit, difficult appraisals and more recently, the limited inventory of buildable lots in certain markets,” explained NAHB Chief Economist David Crowe. “These are the complicating factors that make it difficult for builder confidence to reach and surpass the 50-point mark, at which an equal number of builders view sales conditions as good versus poor.”

It was an odd overnight session for bond markets--not in the sense that odd things were happening, but rather, nothing much happened at all. Volume reflected that fact and despite the presence of a few headline and data tidbits, markets didn't respond meaningfully to anything at all, instead opting to drift sideways and slightly weaker.

Th oddness ended and weakness ramped up a bit with Goldman Sachs' earnings around 7:30am. Indeed that was the first injection of volume and directional movement of the day, taking 10yr yields a quick 2bps higher into the 8am hour.

10yr yields opened the day at 1.705 and Fannie 3.0s walked in the door at 104-28, though had traded just over 105 in a bit of pre-market trading.

Neither side of the market paid much attention to the morning's data as CPI was slightly hotter than expected at the headline level, but on pace with respect to the core reading (excludes food/energy). TIC data (Treasury International Capital) showed an expected uptick in long term inflow from foreign investors, but the data is from August, and thus of little consequence to current trading.

The last chance for scheduled economic data to have a noticeable impact this morning was the 9:15am Industrial Production report. Despite coming in at +0.4 vs a +0.2 forecast, the report largely fell on deaf ears, and again, neither side of the market seemed to care.

Either we're wholeheartedly confirming apathy or markets are waiting with more anticipation than we'd imagined for Thursday's EU Summit. There is one more piece of scheduled data this morning (NAHB Housing Market Index at 10am) and a few instances of Fed-speak after that, but it looks like trading levels will do their best to maintain the current disconnection between "stuff that happens" and logical, directional movement.

Fannie 3.0s are currently down 5 ticks on the day at 104-29 and 10yr yields are up almost 4 bps at 1.706

Industrial production rose 0.4 percent in September after having fallen 1.4 percent in August. For the third quarter as a whole, industrial production declined at an annual rate of 0.4 percent. Manufacturing output increased 0.2 percent in September but moved down at an annual rate of 0.9 percent in the third quarter. Production at mines advanced 0.9 percent in September, and the output of utilities moved up 1.5 percent.

Roughly 0.3 percentage point of the decline in overall industrial production in August reflected the effect of precautionary idling of production in late August along the Gulf of Mexico in anticipation of Hurricane Isaac, and part of the rise in September is a result of the subsequent resumption of activity at idled facilities. At 97.0 percent of its 2007 average, total industrial production in September was 2.8 percent above its year-earlier level. Capacity utilization for total industry moved up 0.3 percentage point to 78.3 percent, a rate 2.0 percentage points below its long-run (1972--2011) average.

- Headline CPI +0.6 vs +0.5 Consensus
- Core CPI +0.2 vs +0.2 Consensus

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.6 percent in September on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 2.0 percent before seasonal adjustment. For the second month in a row, the substantial increase in the all items index was mostly the result of an increase in the gasoline index, which rose 7.0 percent in September after increasing 9.0 percent in August. The other major energy indexes increased in September as well.