“On Dec. 23, 2011, President Obama signed into law the Temporary Payroll Tax Cut Continuation Act of 2011. Among its provisions, this new law directs the Federal Housing Finance Agency (FHFA) to increase guarantee fees charged by Fannie Mae and Freddie Mac (the Enterprises) by no less than 10 basis points from the average guarantee fees charged by these companies in 2011 on single-family mortgage-backed securities.

This requirement is effective immediately, meaning that the average guarantee fees charged in 2012 need be at least 10 basis points greater than the average guarantee fees charged in 2011 and that this increase be remitted to the U.S. Treasury, rather than retained as reserves by the Enterprises. The law also requires FHFA to determine a schedule for guarantee fee increases over a two-year period that must satisfy other requirements of the law.

To begin implementation of these requirements, today I am directing Fannie Mae and Freddie Mac to announce before year-end to their seller-servicers that, effective April 1, 2012, the guarantee fee on all single-family residential mortgages shall increase by 10 basis points.

In early 2012, FHFA will further analyze whether additional guarantee fee increases are appropriate to ensure the new requirements are being met. FHFA will announce plans for further guarantee fee increases or other fee adjustments that will then be implemented gradually over the two-year implementation window, taking into consideration risk levels and conditions in financial markets. FHFA will monitor closely the increased guarantee fees imposed as a result of the new law throughout its effective period, which ends Oct. 1, 2021.”

Pending home sales continued to gain in November and reached the highest level in 19 months, according to the National Association of Realtors.

The Pending Home Sales Index,* a forward-looking indicator based on contract signings, increased 7.3 percent to 100.1 in November from an upwardly revised 93.3 in October and is 5.9 percent above November 2010 when it stood at 94.5. The October upward revision resulted in a 10.4 percent monthly gain.

Lawrence Yun, NAR chief economist, said the gains may result partially from delayed transactions. “Housing affordability conditions are at a record high and there is a pent-up demand from buyers who’ve been on the sidelines, but contract failures have been running unusually high. Some of the increase in pending home sales appears to be from buyers recommitting after an initial contract ran into problems, often with the mortgage,” he said. “November is doing reasonably well in comparison with the past year. The sustained rise in contract activity suggests that closed existing-home sales, which are the important final economic impact figures, should continue to improve in the months ahead,” Yun added.

There was a fairly small window of opportunity for this morning's Chicago Purchasing Management Index to bear equivocal fruit, but by coming in slightly higher than consensus and slightly lower than previous results, it has managed to do just that. PMI read at 62.6 today for the month of December versus 62.6 in November. Economists polled by Reuters expected today's reading to be 61.0.

The portion of the index that tracks new orders fell slightly from 70.2 to 68.0. One of the most significant jumps from the last report was seen in the move from 60.2 to 65.7 in "prices paid," but it should be noted that such internal components of non-inflation-specific reports are seldom cause for inflationary concern in and of themselves.

Market reaction has been non-existent with 10yr yields sideways since the report, and in low volume while S&P's are down not even a full point. We'd normally say that we're waiting on the next report of the morning now--Pending Home Sales due in 5 minutes--but it'd be a surprise to see that one have a major organic effect on trading levels.

After a series of improved readings, Jobless Claims rose in the week ending December 24th to 381k. The previous week saw 366k claims and today's consensus called for 375k.

Despite today's higher claims figure, the trend of improvement over the past several reports helped the 4-week moving average to fall to its lowest level since June 2008, this time to 375k from 380,750 last week. Continued Claims, however, rose to 3.601 mln versus 3.557 mln in the previous week. Economists were expecting 3.555 mln.

Market reaction to the data has been largely as-expected, with little uptick in volume and almost completely flat trading in Treasuries and MBS. 10yr notes continue at 1.92 although stock futures have edged down just slightly since the release. So far, fairly uneventful Jobless Claims report and waiting on Chicago PMI, as planned.

Today clearly contains the highest magnitude of domestic economic reports this week. With volumes having been between 20-40% of recent averages over the past few days, perhaps this will be enough to get us closer to 50%? If such a feat is possible, it would likely rely on some ongoing reaction to the key event from the overnight session: Italian sovereign debt auctions. These auctions went off generally within the realm of expectations, but Italian spreads to German Bund benchmarks nonetheless widened slightly, effectively proving that domestic 10yr yields rallied just about the right amount yesterday (irrespective of the motivation).

Things are opening up fairly flat with 10's currently just over half a bp lower at 1.9145 and Fannie 3.5 MBS 1 tick better at 102-19. S&P futures are a few points higher. The first data arrives in moments with Jobless Claims at 8:30am. Markets aren't expected to react too severely to a data set that's notorious for volatility around the holidays, instead preferring to focus on the 9:45am Release of Chicago PMI (seen at 61.0 vs a previous 62.6. After that, Pending Home Sales hits at 10am with a forecast for a +2.0% increase versus a previous 10.4%. Keep in mind that this is effectively the last day of the week for many a market participant with tomorrow being a half day ahead of a 3 day weekend.