MBS Pricing Snapshot

Firms responding to the October Business Outlook Survey reported a modest improvement in business activity this month. The survey’s indicators for general activity returned to positive territory, while new orders and shipments recorded levels near zero. But firms reported continuing declines in employment and hours worked. Indicators for the firms’ expectations over the next six months remained positive.

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased 8 points, to 5.7, marking the first positive reading since April (see Chart). A little over 28 percent of firms reported increases in activity this month, up from 21 percent last month. The demand for manufactured goods, as measured by the current new orders index, decreased 2 points, to -0.6. Shipments rebounded from last month but were roughly flat this month. The current shipments index increased 21 points, to -0.2; inventories were near steady; and firms reported continued declines in unfilled orders and shorter delivery times.

Labor market conditions at the reporting firms remained weak this month. The current employment index dipped 3 points, to -10.7, its lowest reading since September 2009. Twice as many firms reported decreases in employment (22 percent) as reported increases (11 percent). Firms also indicated fewer hours worked: The average workweek index, at -7.6, was negative for the seventh consecutive month.

More firms reported paying higher prices for inputs, and the prices received for manufactured goods rose modestly this month. The prices paid index increased from 8 last month to 19 in October, with 30 percent of the firms reporting input price increases. With respect to their own manufactured goods, the percentage reporting an increase in prices (19 percent) was greater than the percentage reporting a decrease (14 percent). The prices received index rose to 5.4 from -0.2.

Overnight trading in US Treasuries and S&P futures--our two respective proxies for the broader bond and stock markets during, especially during nocturnal hours--both traded clearly delineated technical ceilings overnight.

10's ground up against the mid 1.82's, which is also the 200-day moving average. S&P futures bumped their heads incessantly on the 1457 to 1458 mark.

The levels aren't necessarily as important here as the fact that the broader undertones of "risk" have finally gone sideways in decent volume as opposed to stampeding relentlessly in a "risk-on" direction. Further to the point of not focusing too much on levels, the moving average in TSYs and the big potential "triple top" in stocks don't necessarily mean that such levels will be hard and fast lines that cannot be crossed.

Indeed, the last two times that 10's approached the 200 day MA, it either fell short or broke through, but rarely ever bounces perfectly on the line itself--more of a broad indicator. The point is not to get too caught up in making conclusions based on today's trading levels with the benefit of some additional hindsight.

For now, things are off to a relatively pleasant start for bond markets and MBS. 10's are down to 1.7974 and Fannie 3.0s are up 5 ticks to 104-15. Higher than expected Jobless Claims helped facilitate the overnight bounce already in the works, but the 10am Philly Fed data also needs to be fairly friendly if we're to maintain the current level of equanimity.

- 388k vs 365k Consensus
- No specific mention of which state caused last week's underreporting issue, but this mornings number makes last week's number look like the outlier as opposed to an indication of a break from the stagnant, sideways trend.

From the DOL:
In the week ending October 13, the advance figure for seasonally adjusted initial claims was 388,000, an increase of 46,000 from the previous week's revised figure of 342,000. The 4-week moving average was 365,500, an increase of 750 from the previous week's revised average of 364,750.

The advance seasonally adjusted insured unemployment rate was 2.5 percent for the week ending October 6, a decrease of 0.1 percentage point from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending October 6 was 3,252,000, a decrease of 29,000 from the preceding week's revised level of 3,281,000. The 4-week moving average was 3,275,500, a decrease of 5,750 from the preceding week's revised average of 3,281,250.