MBS Pricing Snapshot

Stocks are surging and bond markets have quickly weakened--several ticks in MBS and 1.5 bps in Treasuries after Bloomberg reported that Obama will offer a Cliff Deal Compromise to Congressional leaders today. These aren't big moves in and of themselves, but could be the beginning of further momentum. Reprice risk is moderately higher for lenders who were already out with rates, though a lot depends on the follow through trade that we may or may not see shortly.

Please note: for almost any lender, this alert is an early warning that markets are experiencing some turbulence. It could settle back down or it could materialize into more substantial reprice risk. MBS are still in their AM range for now, but stocks and Treasuries are suggesting they break to the downside, and soon.

Pending home sales increased in November for the third straight month and reached the highest level in two-and-a-half years, according to the National Association of Realtors®.

The Pending Home Sales Index,* a forward-looking indicator based on contract signings, rose 1.7 percent to 106.4 in November from a downwardly revised 104.6 in October and is 9.8 percent above November 2011 when it was 96.9. The data reflect contracts but not closings.

The index is at the highest level since April 2010 when it hit 111.3 as buyers were rushing to beat the deadline for the home buyer tax credit. With the exception of several months affected by tax stimulus, the last time there was a higher reading was in February 2007 when the index reached 107.9.

Lawrence Yun , NAR chief economist, said home sales are on a sustained uptrend. "Even with market frictions related to the mortgage process, home contract activity continues to improve. Home sales are recovering now based solely on fundamental demand and favorable affordability conditions."

- PMI 51.6 vs 51.0 Consensus
- New Orders 54.0 vs 45.3 in Nov
- Employment 45.9 vs 55.2 in Nov

The Chicago Purchasing Managers reported the Chicago Business Barometer was up for a third month, lumbering along since September's 3 year low. The Business Barometer was guided higher almost exclusively by a sizable advance in New Orders. In spite of the rise in the Chicago Business Barometer, five of the seven business activity indexes declined in December, most significantly the Employment Index.

• NEW ORDERS: Biggest advance in 19 months
• EMPLOYMENT: Contracted to 3 year low
• ORDER BACKLOGS: Fifth consecutive month in contraction.

General Comments from Members of the Survey Panel:

"Capital will shift to new products from current product support."

"We have more work than we have people to do it."

"We are on a hiring freeze in Q4, waiting to assess the outcome of the fiscal cliff deliberations."

Two day charts do an exceptional job of conveying the most relevant trading themes surrounding the Fiscal Cliff. Yesterday afternoon's slow, steady improvements offered up a "pitch" for any positive Fiscal Cliff headline. Just before 3pm, a batter stepped up to the plate and made contact. News that Congress would reconvene on Sunday evening at 6:30pm was construed as a solid base-hit as stock prices and bond yields rose fairly quickly.

Almost all of that move was finished before the extremely slow overnight session began. Asia didn't seem to react much, but markets took on a skeptical stance into European hours. The picture soon came into view of Thursday's "base-hit" merely amounting to a pop fly, quickly falling back to earth.

And now this morning, domestic traders have finished off the skepticism that began in Europe with the earliest risers selling stocks and buying bonds ahead of the 8am open with the hour and a half of trading since then confirming the move. In other words, the ball is back on the same ground that it was before yesterday afternoon's base hit.

Fannie 3.0s are up 4 ticks at 104-29, right in line with yesterday's best levels. 10yr yields are back down to 1.706, right in line with yesterday's lows and S&P futures have slumped just over 10 points since yesterday's close.

The game, however, isn't over yet, and there's at least one more meaningful pitch this week. The President hosts Congressional Majority/Minority leaders in closed door meetings at the white house. "There's the wind-up!" The "pitch" will come if we get any actionable soundbytes following the talks. The risk to bond markets is that the meeting's conclusion amounts to another, more solid "hit" for risk markets, potentially hearkening an 11th hour deal, destined for legislative Hail Mary's beginning with the House's Sunday session.

For now, markets continue to look like they're mostly just waiting for the pitch before they take off running. That said, the domestic stock market open has seen a slight uptick in equities in the first 5-6 minutes of trading and a bit of pressure on bond markets as a result. The nice thing about all this Fiscal Cliff trading is that the "stock lever" has been quite well connected as markets trade broad "risk-on vs risk-off" concepts, just like the good old days. The risk is that equities markets muster more optimism about the "pitch" that's probably coming later today, forcing bond markets to take up a more defensive stance ahead of time.

Chicago PMI data is coming up at 9:45am followed by Pending Home Sales at 10am. Volume has been fairly low this morning, so with nothing better to swing at for now, markets may try their luck with some sort of reaction to the PMI data by way of warm-up for their actual "at-bat" following whatever news is produced by today's meeting.