MBS Pricing Snapshot

10yr yields were as high as 1.749 in the overnight session, but began to decline as soon as Europe came on line (2-3am New York time). Treasuries weren't willing to chase German Bunds lower in yield too quickly, but did make it back to yesterday afternoon's lows during the course of the European session. Despite that unwillingness to chase the Bunds initially, Treasuries WERE able to hold their ground at those slightly improved levels while Bund yields corrected back into more moderate territory, effectively maintaining those levels (1.725-1.735) until the domestic open.

Both MBS and Treasuries hit opening marks near unchanged levels vs yesterday's latest, but began to improve even before the economic data was released. Surprisingly, CPI data actually appears to have had a positive effect for bond markets (not that we expected a negative effect, but ANY effect from inflation data these days is rare). Markit PMI data looked to have caused an almost imperceptible pause for consideration, but flows picked up following the Industrial Production data from the Fed.

At first glance, the Industrial Production data was significantly better than expected, and markets looked as if they would trade it accordingly in the first 3-4 minutes following the release, but the report's internals--suggesting the bounce higher was largely a factor of correcting Sandy-related weakness--quickly shifted the momentum in the other direction. Stock futures fell and 10yr yields are now down to 1.7023. Fannie 3.0 MBS have seen some overhead resistance at 104-24, but currently trade 4 ticks higher on the morning at 104-23.

So far so good, then, with respect to holding technical ground mentioned in The Day Ahead. From here on out, there's little else by way of guidance, so we're either waiting for Cliff headlines or simply doing some sort of Tango with the stock lever, hoping to close inside those relatively important support levels.

- Output +1.1 vs +0.3 Consensus, -0.7 Previous
- Capacity Use 78.4 vs 78.0 consensus, 77.7 previous
- Fed says gains largely reflect bounce-back at industries affected by Sandy, vehicle output gains a factor

Industrial production increased 1.1 percent in November after having fallen 0.7 percent in October. The gain in November is estimated to have largely resulted from a recovery in production for industries that had been negatively affected by Hurricane Sandy, which hit the Northeast region in late October. In November, manufacturing output increased 1.1 percent after having decreased 1.0 percent in October; in addition to the storm-related rebound, a sizable rise in the production of motor vehicles and parts boosted factory output in November. The output of utilities advanced 1.0 percent, and production at mines rose 0.8 percent. At 97.5 percent of its 2007 average, total industrial production in November was 2.5 percent above its year-earlier level. Capacity utilization for total industry increased 0.7 percentage point to 78.4 percent, a rate 1.9 percentage points below its long-run (1972–2011) average.

- PMI rises to eight-month high and signals solid improvement in business conditions

- Strongest rates of output and new order growth since April

- Solid rate of job creation

- Input price inflation remains sharp

At 54.2, the Markit Flash U.S. Manufacturing Purchasing Managers’ Index (PMI) signalled a solid improvement in U.S. manufacturing business conditions during December. Up from 52.8 in November, the ‘flash’ PMI reading, which is based on around 85% of usual monthly replies, indicated the strongest rate of growth for eight months.

- Headline CPI -0.3 vs -0.2 consensus
- Core CPI +.1 vs +.2 consensus
- Sandy had little effect on data collection
- First decline in headline CPI since May, but note that Core CPI (excludes food/energy) still rose. Thank you Gasoline (-7.4 pct)

The Consumer Price Index for All Urban Consumers (CPI-U) declined 0.3 percent in November on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.8 percent before seasonal adjustment.

The gasoline index fell 7.4 percent in November; this decrease more than offset increases in other indexes, resulting in the decline in the seasonally adjusted all items index. The energy index fell 4.1 percent in November despite increases in the indexes for natural gas and electricity. The food index rose 0.2 percent with the food at home index increasing 0.3 percent, the same increases as in October.