In our last live MBS update we informed dashboard participants that "mortgages are coming off their best levels of the day as stocks attempt to rally from their lows" and "we will alert if stocks continue to rally and MBS shed more price gains." Well, stocks have extended their recovery effort (on short covering) and production MBS coupons are now 10/32 off morning price highs. This will lead some lock desks to recall rate sheets and reissue for the worse while others will simply delay their initial release until the market finds stable ground. Either way loan pricing appreciations will not be as robust as originally expected today. MBS are however still in positive territory so rebate should not be worse than yesterday's indications.

(Reuters) - The pace of growth in the U.S. services sector picked up modestly in May after a sharp drop in the previous month, according to an industry report released on Friday. The Institute for Supply Management said its services sector index rose to 54.6 last month from 52.8 in April. The reading came in just above economists' forecasts for 54.0, according to a Reuters survey. The bounce came after April's reading fell to the lowest level since August 2010. A reading above 50 indicates expansion in the sector. (Reporting by Leah Schnurr, Editing by Chizu Nomiyama)

Mortgages are coming off their best levels of the day as stocks attempt to rally from their lows. The Fannie Mae 4.0 is still deep in the green, up 10/32 at 101-05, but is 5/32 off the intraday high of 101-10. The timing of this retracement is poor as lock desks are in the process of creating rate sheets. This move will likely trim day over day rebate appreciations a bit but loan pricing should still improve by 15 to 25bps, that is unless MBS prices continue to fall. While the stock lever is exerting negative pressure on bonds we're not seeing much push-back from traders, which isn't surprising when one considers that Treasury will auction $66bn in debt supply next week. The broader trend in bonds is still bullish, but this price action should serve as another reminder of the risks associated with floating loans that must be locked on a short timeline. Even in a broader bullish trend, back-ups and reversals are always a threat. We will alert if stocks continue to rally and MBS shed more price gains.

Rate sheets will improve today after bond markets reacted favorably to weak labor market data this morning. Nonfarm payrolls increased 54,000 last month when economists polled by Reuters had expected payrolls to rise 150,000. "Rate sheet influential" MBS coupons are +14/32 at 101-08, recovering almost all of the price declines experienced yesterday. The move in mortgages is being led by benchmark TSYs which have broken back into the 2.00% handle. 10s are currently +21/32 at 101-15 yielding 2.955% (-7.5bps). Based on this reaction loan pricing could improve by as much as 50bps.

(Reuters) - Employment rose far less than expected in May to record its weakest reading since September, while the jobless rate rose to 9.1 percent as high energy prices and the effects of Japan's earthquake bogged down the economy. Nonfarm payrolls increased 54,000 last month, the Labor Department said on Friday, with private employment rising 83,000, the least amount since June. Government payrolls dropped 29,000. Economists polled by Reuters had expected payrolls to rise 150,000 and private hiring to increase 175,000 in May. The government revised employment figures for March and April to show 39,000 fewer jobs created than previously estimated. The job creation slowdown confirmed the economic weakness already flagged by other data from consumer spending to manufacturing. It could stoke fears about the depth and duration of a slowdown that started early in the year. The Labor Department said severe weather last month, including tornadoes and flooding, in the Midwest and the South did not materially affect data collection. It also said that while some workers in those regions may have been temporarily displaced from their jobs, it found "no clear impact of the disasters on the national employment and unemployment data for May." Economists still believe the lull in activity will be temporary. They cite high gasoline prices, bad weather and disruptions to motor vehicle production because of a shortage of parts from Japan as factors weighing on growth.

Rising jobless claims and Wednesday's much weaker ADP private jobs report have severely diminished forecasts for the all-important Nonfarm Payrolls employment report coming out at 8:30 ET. Predictions were already low at the start of the week - averaging 190k versus 244k the month before - and now it's more common to hear prayers for anything above 100k. "Last week, we had penciled in a below-consensus 170,000 gain in nonfarm payrolls, but following this week's cast of dismal economic characters, we'll be happy to take any six-figure number," said BMO Capital Markets an hour before the report. RDQ Economics commented Thursday: "We look for private payrolls to have risen 150,000 in May, which compares to an average monthly gain of 253,000 over the last three months (and we see total nonfarm payrolls up 140,000)." Nomura Global Economics added: "We expect tomorrow's nonfarm payrolls to show employment expansion, but not at the levels required for a robust jobs recovery. Our forecast is for a 85k increase in nonfarm payrolls; 110k rise in private payrolls; 10k decline in manufacturing employment; and, an unchanged unemployment rate (9.0%)." The Unemployment Rate is still widely expected to inch down to 8.9%. Thirty minutes before the report, the benchmark 10-year Treasury yield is at 3.02%, versus 3.03% at Thursday's close. The two-year note remains at 0.46%, and the 30-year yield is down one basis point at 4.24%. Like Treasuries, mortgages are mostly flat. The FNCL 4.0 coupon is +3/32 at 96-28 and the 30 year FN4.5 is +1/32 at 100-27. Equity trading is equally cautious: S&P 500 futures are 5 points lower at 1,307.50 and Dow futures are 32 points down at 12,207. Commodity prices are lower. Light crude oil fell 0.79% overnight to $99.61 per barrel, and gold prices dropped 0.29% to $1,528.20 per ounce.

UPDATED AT 11:30AM...