MBS Pricing Snapshot

After weaker-than-expected ISM Manufacturing PMI, bond markets continued a rally already underway since 9:40am. Treasury yields moved lower with stocks and MBS rose from 105-00 to 105-05.

In terms of the reprice outlook, this is probably not enough movement AND too soon in the day for all but one or two lenders to even be considering a positive reprice, let alone pulling the trigger. But if we continue to hold ground or improve from here, it might not take long.

More of an update though, that we're off the lows since the stock market open, helped along by a surprisingly "connected" reaction to econ data.

- Spending +1.4 vs +0.5 consensus
- Rate of change smaller than margins of error.
- Biggest rise since May
- Total spending highest since Sept 2009
- Private residential spending highest since Nov 2008
- Minimal effect from Sandy

The U.S. Census Bureau of the Department of Commerce announced today that construction spending during October 2012 was estimated at a seasonally adjusted annual rate of $872.1 billion, 1.4 percent (±2.0%)* above the revised September estimate of $860.4 billion. The October figure is 9.6 percent (±2.3%) above the October 2011 estimate of $795.7 billion.

During the first 10 months of this year, construction spending amounted to $707.4 billion, 9.3 percent (±1.3%) above the $646.9 billion for the same period in 2011.

PRIVATE CONSTRUCTION
Spending on private construction was at a seasonally adjusted annual rate of $592.1 billion, 1.6 percent (±1.5%) above the revised September estimate of $582.7 billion. Residential construction was at a seasonally adjusted annual rate of $294.2 billion in October, 3.0 percent (±1.3%) above the revised September estimate of $285.7 billion. Nonresidential construction was at a seasonally adjusted annual rate of $297.9 billion in October, 0.3 percent (±1.5%)* above the revised September estimate of $297.0 billion.

PUBLIC CONSTRUCTION
In October, the estimated seasonally adjusted annual rate of public construction spending was $280.1 billion, 0.8 percent (±3.1%)* above the revised September estimate of $277.7 billion. Educational construction was at a seasonally adjusted annual rate of $69.3 billion, 0.9 percent (±5.6%)* above the revised September estimate of $68.6 billion. Highway construction was at a seasonally adjusted annual rate of $76.7 billion, 2.4 percent (±7.2%)* below the revised September estimate of $78.6 billion.

- PMI 49.5 vs 51.3 consensus
- New Orders 50.3 vs 54.2
- Manufacturing activity lowest since July 2009
- Employment index at 48.4, lowest since Sept 2009

Economic activity in the manufacturing sector contracted in November following two months of modest expansion, while the overall economy grew for the 42nd consecutive month, say the nation's supply executives in the latest Manufacturing ISM Report On Business.

The PMI™ registered 49.5 percent, a decrease of 2.2 percentage points from October's reading of 51.7 percent, indicating contraction in manufacturing for the fourth time in the last six months. This month's PMI™ reading reflects the lowest level since July 2009 when the PMI™ registered 49.2 percent.

The New Orders Index registered 50.3 percent, a decrease of 3.9 percentage points from October, indicating growth in new orders for the third consecutive month.

The Production Index registered 53.7 percent, an increase of 1.3 percentage points, indicating growth in production for the second consecutive month.

The Employment Index registered 48.4 percent, a decrease of 3.7 percentage points, which is the index's lowest reading since September 2009 when the Employment Index registered 47.8 percent.

The Prices Index registered 52.5 percent, reflecting a decrease of 2.5 percentage points.

Comments from the panel this month generally indicate that the second half of the year continues to show a slowdown in demand; respondents also express concern over how and when the fiscal cliff issue will be resolved.

The overnight session began well enough for bond markets with 10yr yields right in line with Friday's latest levels as late as 5:50am. Despite the relative flatness, several developments in Europe were already starting to weigh on Treasuries and Core EU debt.

Greece announced a bond buy-back with a price range that exceeded market expectations. The buy-back itself is part of last week's agreement, and not unexpected, but the price range wasn't yet determined. Bolstering the sense of positivity surrounding Greece was a separate report from a German paper over the weekend that Merkel raised the possibility of public sector haircuts on Greek debt (also seen as OSI or "official sector involvement"). Multiple Eurozone Finance Ministers quickly dismissed the possibility, but its mere mention by Merkel is "new," and probably an anecdote that errs on the side of bond market weakness in the US.

The biggest dose of weakness for domestic bond markets came late in the overnight session as Spain made a formal request of EU aid to the tune of €39.5 bln. It's important to note that this IS NOT a sovereign request, but rather, the decision on an amount for the "up to €100 bln" already agreed to for Spanish BANK RECAPITALIZATION. Some of the initial fervor of the reaction could be due to this distinction (though the reaction would likely have grown and been bigger if it was a sovereign request).

All of the above ushered domestic bond markets in the door at moderately weaker levels with 10yr yields coming in the door just over 1.64 and Fannie 3.0 MBS right at 105-00. Since then, MBS have been able to hold sort of a choppy, sideways slightly, while Treasuries have been clearly drifting higher in yield, though gently so. A slightly better-than-expected Manufacturing PMI reading from Markit played a small contributing role heading into the 9am hour, and 10am brings the ISM Manufacturing PMI. If it confirms the positivity, it will be interesting to note markets' willingness to react to economic data with other, bigger events looming (NFP this Friday, FOMC next week, Fiscal Cliff in general).

- PMI 52.8 vs 52.4 Previously, 51.0 in October
- Output 53.5 vs 52.9 Previously, 51.4 October
- New Orders 53.6 vs 52.8 previously, 51.1 October

The expansion of the U.S. manufacturing sector gained traction in November, with the final Markit U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) rising to its highest level in six months. At 52.8, up from 51.0 in October, the PMI was higher than the flash estimate of 52.4, and signalled a moderate improvement in overall business conditions.

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

Manufacturing output increased further in November, with approximately one-in-five surveyed firms reporting higher production since October. Moreover, output rose solidly over the month, with the rate of growth the fastest since May. Sector data indicated that the strongest output expansion was reported by producers of consumer goods.