MBS Pricing Snapshot

It's been an uncharacteristically slow morning, even for a Monday, with a relative lack of data, Japan out for holiday and lighter domestic participation due to Rosh Hoshanah. Bond markets were generally flat during the first half of the overnight session with 10's trading a range of 1.85 to 1.88.

Volume picked up slightly (relative to what it was, anyway) into the domestic session and with the help of a weaker-than-expected Empire State Manufacturing Survey, 10's made it down to 1.83 before reversing course. They're currently back up to 1.86's while MBS are similarly mid-range between this morning's lows and highs at 104-04 in Fannie 3.0s.

Apart from the Empire State data, there's nothing else on the domestic calendar in terms of economic data today, and indeed the next main event feels like the cash open for stocks. S&P futures treated Friday afternoon's lows as a supportive floor several times in the overnight session and ongoing support there would continue to build a case for "risk-on" vs "risk-off."

While things could definitely be worse this morning, we're disheartened by tepidness of this bounce back from Friday afternoon's lows. 10's continue to content with a disconcerting short-term pivot in the 1.83's and Fannie 3.0's have been unwilling to go higher than 104-08. To be sure, the latter is far less disconcerting than the former, but if Treasuries continue to break down, there's only so much outperformance to be had on the part of MBS before we feel the effects.

In the scope of the generally trend of selling that's prevailed in September, this morning's bounce back makes sense from a technical standpoint and, if anything, is underdone. This is one of the aspects adding to the disconcerted feelings in that bond markets could rally 5-8 more bps in 10yr yields without causing any sort of upset to the general trend of selling. Given the MBS-specific nature of QE3, we'd expect MBS to continue outperforming, but even post-QE3 MBS have their limits if the broader sell-off continues too long. To that end, a potential break into 1.9's this week in 10yr yields scares us. Stay frosty.

- Current Conditions -10.41 vs -2.0 consensus
- New Orders -14.03 vs -5.5 last time
- Current Conditions lowest since 4/2009
- New Orders Lowest Since 11/2010

The August Empire State Manufacturing Survey indicates that conditions for New York manufacturers deteriorated over the month. The general business conditions index slipped below zero for the first time since October 2011, falling thirteen points to -5.9. At -5.5, the new orders index was below zero for a second consecutive month, and the shipments index fell six points to 4.1. The prices paid index climbed nine points to 16.5, pointing to a pickup in the pace of increase in input prices, while the prices received index hovered just above zero for a third consecutive month. The index for number of employees inched lower, but remained positive at 16.5, suggesting a moderate increase in employment levels, and the average workweek index rose to 3.5. Indexes for the six-month outlook were generally positive but lower than in July, indicating that respondents expected business conditions to improve little in the months ahead.

In a series of supplementary questions, manufacturers were asked about modifications to 2012 hiring and capital spending—both year-to-date changes and revisions planned for the rest of the year. Substantially more firms (roughly twice as many) made downward than upward revisions in their plans for the second half of the year. As for actual spending year-to-date, modest downward adjustments were made, on balance. When asked about negative influences on 2012 hiring and capital spending plans, a majority of respondents cited increased uncertainty about business prospects.