(Reuters) - A gauge of factory activity in Kansas and surrounding states pointed to modest growth in August, standing in contrast with other surveys that have suggested weak U.S. manufacturing during the month. The Federal Reserve Bank of Kansas City said on Thursday its composite index of regional manufacturing held steady at 3 in August, unchanged from a month earlier. "Factory activity in our region continues to be buoyed by strong growth among agriculture and energy-related manufacturers," said Kansas City Fed economist Chad Wilkerson. Last week, the Philadelphia Fed's factory survey showed output plunged in the Mid-Atlantic region in August, dampening hopes for a quick revival in growth. Data from other regional Fed factory indexes has also been weak. Any reading below zero in the Kansas City Fed index indicates contraction in the region's manufacturing. The index is a measure of factory output, shipments, new orders and employment in the region. The index for output was minus 2 during August, pointing to contraction, while employment and new orders indexes pointed to growth. The survey covers factories in Kansas, Colorado, Nebraska, Oklahoma and Wyoming, as well as the western third of Missouri and the northern half of New Mexico. (Reporting by Jason Lange; Editing by Neil Stempleman)

MBS and Treasuries are recovering from news that Berkshire Hathaway will invest $5 bln in Bank of America. Stock futures exploded higher on the news, from around 1170 to 1185 in S&P futures, and ultimately up over 1190 in the cash market open. But since then, they must have gotten the phone call that despite Buffett's sagacious wisdom of the past, this BofA investment is dumb, and it doesn't fix the economy, because S&Ps are back down to 1182.24. After initially turning red on the stock rally, MBS and Treasuries are back to green. 4.0's are at 103-17 and 10yr notes at 2.2533. There's no other economic data or unexpected displays of "strategy" expected this morning. (OK, so maybe we're not actually sure if anything unexpected is expected, but given the ultimate course of trading that followed this "unexpected" announcement, it might as well have been expected). What we do know is that the next expected item of importance will be the 1pm auction of 7yr notes.

"We describe a set of six design principles for the reorganization of the U.S. housing finance system and apply them to one model for replacing Fannie Mae and Freddie Mac that has so far received frequent mention but little sustained analysis – the lender cooperative utility. We discuss the pros and cons of such a model and propose a method for organizing participation in a mutual loss pool and an explicit, priced government insurance mechanism. We also discuss how these principles and this model are consistent with preserving the “to-be-announced,” or TBA, market – particularly if the fixed-rate mortgage remains a focus of public policy."

The Obama administration is considering further actions to strengthen the housing market, but the bar is high: plans must help a broad swath of homeowners, stimulate the economy and cost next to nothing. One proposal would allow millions of homeowners with government-backed mortgages to refinance them at today’s lower interest rates, about 4 percent, according to two people briefed on the administration’s discussions who asked not to be identified because they were not allowed to talk about the information. A wave of refinancing could be a strong stimulus to the economy, because it would lower consumers’ mortgage bills right away and allow them to spend elsewhere. But such a sweeping change could face opposition from the regulator who oversees Fannie Mae and Freddie Mac, and from investors in government-backed mortgage bonds.

Despite a decent smattering of bond-bullish developments overnight, MBS and Treasuries were little changed earlier this morning. But a 417k print on weekly Jobless claims has things back into the green. Fannie 4.0's are back to yesterday's pre-auction levels at 103-20, and 10yr notes are down from 2.30+ to 2.273. On a disturbing note, 10yr yields just bounced off the trendline that initially provided support yesterday at 2.257. So we'll have to keep an eye on that to see if 10's have ongoing technical issues moving lower. If current levels hold, rate sheets should be improved today, but perhaps conservatively so given tomorrow's high impact event.

(Reuters) - Initial claims for state unemployment benefits rose 5,000 to a seasonally adjusted 417,000, the Labor Department said, but still nowhere near levels that would signal a recession. Striking Verizon workers filed 8,500 claims for jobless benefits last week, after submitting 12,500 applications the previous week, which covered the period for the August nonfarm payrolls survey. That suggests that the strike would have a negative affect on the payrolls count, which will be reported on Sept. 2. The strike against Verizon has ended. Economists polled by Reuters had forecast claims rising to 405,000 last week. The prior week's claims were revised up to 412,000 from the previously reported 408,000. While the labor market regained some ground in July a new wave of layoffs especially in the financial sector, coupled with the deterioration in business sentiment, could reverse the trend in the months ahead. Employers added 117,000 new jobs in July after increasing payrolls by only 99,000 in May and June combined. A Labor Department official said there was nothing unusual in the state-level data. The four-week moving average of claims, considered a better measure of labor market trends, rose 4,000 to 407,500. The number of people still receiving benefits under regular state programs after an initial week of aid fell 80,000 to 3.64 million in the week ended Aug.13. Data for the so-called continuing claims covered the survey period for the household survey from which the unemployment rate is derived. The unemployment rate fell to 9.1 percent from 9.2 percent in June. The number of Americans on emergency unemployment benefits fell 43,827 to 3.09 million in the week ended Aug. 6, the latest week for which data is available. (Reporting by Lucia Mutikani; Editing by Neil Stempleman)