MBS Pricing Snapshot

MBS hit their lows of the morning, falling 6 ticks to 104-23 shorter after a heavy morning of economic data wrapped up. The Fed is also in the midst of scheduled buying in the 30yr range, which is normally a supportive event for bond markets. This adds to the concern for ongoing weakness this morning and introduces the risks of negative reprices for lenders who released rate sheets before 10am. Stocks are sharply higher this morning. Bond markets had been doing a good job of resisting that "risk-on" movement, but have been slipping since 10:30am.

- +0.6 vs +0.6 consensus
- Private construction highest since October 2009
- Public construction lowest since December 2006

The U.S. Census Bureau of the Department of Commerce announced today that construction spending during September 2012 was estimated at a seasonally adjusted annual rate of $851.6 billion, 0.6 percent (±2.1%)* above the revised August estimate of $846.2 billion. The September figure is 7.8 percent (±2.1%) above the September 2011 estimate of $790.3 billion.

During the first 9 months of this year, construction spending amounted to $624.8 billion, 8.9 percent (±1.3%) above the $573.7 billion for the same period in 2011.

Spending on private construction was at a seasonally adjusted annual rate of $580.5 billion, 1.3 percent (±1.3%)* above the revised August estimate of $572.8 billion. Residential construction was at a seasonally adjusted annual rate of $285.9 billion in September, 2.8 percent (±1.3%) above the revised August estimate of $278.0 billion. Nonresidential construction was at a seasonally adjusted annual rate of $294.6 billion in September, 0.1 percent (±1.3%)* below the revised August estimate of $294.8 billion.

In September, the estimated seasonally adjusted annual rate of public construction spending was $271.1 billion, 0.8 percent (±3.1%)* below the revised August estimate of $273.4 billion. Educational construction was at a seasonally adjusted annual rate of $66.7 billion, 0.8 percent (±3.6%)* below the revised August estimate of $67.2 billion. Highway construction was at a seasonally adjusted annual rate of $78.4 billion, 1.6 percent (±7.4%)* below the revised August estimate of $79.6 billion.

- headline index 51.7 vs 51.2 consensus
- employment index 52.1 vs 54.7 in September

"The PMI™ registered 51.7 percent, an increase of 0.2 percentage point from September's reading of 51.5 percent, indicating growth in manufacturing at a slightly faster rate. The New Orders Index registered 54.2 percent, an increase of 1.9 percentage points from September, indicating growth in new orders for the second consecutive month. The Production Index registered 52.4 percent, an increase of 2.9 percentage points, indicating growth in production following two months of contraction. The Employment Index registered 52.1 percent, a decrease of 2.6 percentage points, and the Prices Index registered 55 percent, reflecting a decrease of 3 percentage points. Comments from the panel this month reflect continued concern over a fragile global economy and soft orders across several manufacturing sectors." -ISM

- Most notably, the "present situation" index increased to 56.2 vs 48.7 in September

The Conference Board Consumer Confidence Index®, which had increased in September, improved again in October. The Index now stands at 72.2 (1985=100), up from 68.4 in September. The Present Situation Index increased to 56.2 from 48.7. The Expectations Index rose to 82.9 from 81.5 last month.

The monthly Consumer Confidence Survey®, based on a probability-design random sample, is conducted for The Conference Board by Nielsen, a leading global provider of information and analytics around what consumers buy and watch. The cutoff date for the preliminary results was October 18.

Says Lynn Franco, Director of Economic Indicators at The Conference Board: “The Consumer Confidence Index increased again in October and is now at its highest level this year. Consumers were considerably more positive in their assessment of current conditions, with improvements in the job market as the major driver. Consumers were modestly more upbeat about their financial situation and the short-term economic outlook, and appear to be in better spirits approaching the holiday season.”

Consumers’ assessment of current conditions improved in October. Those claiming business conditions are “good” rose to 16.5 percent from 15.3 percent, while those saying business conditions are “bad” edged down to 33.1 percent from 33.8 percent. Consumers’ appraisal of the labor market was also more positive. Those stating jobs are “plentiful” increased to 10.3 percent from 8.1 percent, while those claiming jobs are “hard to get” declined to 39.4 percent from 40.7 percent.

The fact that yesterday was not only the first day back after a day and a half of market closures but also the last day of the month created some uncertainty as to how "real" the positivity might be. Trading so far on November 1st would seem to indicate that yesterday was no fluke.

Treasuries weakened gently overnight on the back of stronger PMI data out of China. At least that's the consensus, but we're just as happy to look at the day so far as a logical technical bounce. With or without data, the safest trade leading up to tomorrow's NFP (and next week's election?) would be to simply back off a bit from the gains driven by yesterday's month-end buying but not to the point of making any additional technical signal such as breaking higher past yesterday's high yields.

Lo and behold, bond markets did exactly that in the overnight session and continue to do it in the domestic session even after the better-than expected ADP numbers, lower-than-expected Jobless Claims and higher-than-expected Productivity numbers. In light of all "that stuff," a small amount of red this morning seems generally palatable though we won't get too excited unless we're rallying out of the 10am ISM and Consumer Confidence numbers.

Fannie 3.0s are down a mere 2 ticks at 104-27 and 10yr yields are just over 1bp higher at 1.71. Stock futures are in line with yesterday's closing levels.

- PMI falls to 51.0, from 51.1 in September

- Output growth strengthens slightly, but new orders rise more slowly

- New export business declines for fifth successive month

The latest PMI data from Markit pointed to further subdued overall improvement in U.S. manufacturing business conditions as the sector entered the final quarter of 2012 on a weak footing. Output increased at the second-slowest rate of the past three years, as new order growth lost further momentum. New export business remained a drag on the sector, with a fifth successive monthly decline. Compounding manufacturers’ difficulties was a sharper increase in average input prices during the month.

The headline figure derived from the survey is the Markit U.S. Manufacturing Purchasing Managers’ Index™ (PMI™), which is designed to provide timely indications of changes in prevailing business conditions in the U.S. manufacturing sector. PMI readings above 50.0 signal an improvement in business conditions, while readings below 50.0 signal deterioration.

The PMI slipped further in October, edging lower to 51.0, from September’s 51.1. That signaled the weakest overall improvement in manufacturing operating conditions since the sector returned to growth in October 2009. The downward movement in the PMI mainly reflected a slower rise in new order volumes.

- Productivity +1.9 vs +1.6 consensus
- Labor Costs -0.1 vs +1.0 consensus

Nonfarm business sector labor productivity increased at a 1.9 percent annual rate during the third quarter of 2012, the U.S. Bureau of Labor Statistics reported today. The increase in productivity reflects increases of 3.2 percent in output and 1.3 percent in hours worked. (All quarterly percent changes in this release are seasonally adjusted annual rates.) From the third quarter of 2011 to the third quarter of 2012, productivity increased 1.5 percent as output and hours worked rose 3.3 percent and 1.8 percent, respectively.

Labor productivity, or output per hour, is calculated by dividing an index of real output by an index of hours worked of all persons, including employees, proprietors, and unpaid family workers.

Unit labor costs in nonfarm businesses decreased 0.1 percent in the third quarter of 2012, while hourly compensation increased 1.8 percent. Unit labor costs rose 1.1 percent over the last four quarters.

BLS defines unit labor costs as the ratio of hourly compensation to labor productivity; increases in hourly compensation tend to increase unit labor costs and increases in output per hour tend to reduce them.

- Claims 363k vs 370k consensus
- Continued Claims rise to 3.263 mln from 3.259 mln

In the week ending October 20, the advance figure for seasonally adjusted initial claims was 369,000, a decrease of 23,000 from the previous week's revised figure of 392,000. The 4-week moving average was 368,000, an increase of 1,500 from the previous week's revised average of 366,500.

The advance seasonally adjusted insured unemployment rate was 2.5 percent for the week ending October 13, unchanged from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending October 13 was 3,254,000, a decrease of 2,000 from the preceding week's revised level of 3,256,000. The 4-week moving average was 3,269,750, a decrease of 6,750 from the preceding week's revised average of 3,276,500.

- Private Payrolls +158k vs +135k Consensus
- Revisions to previous month same as yesterday's "leak"
- Market reaction is mixed, showing that attention is being paid to the numbers, but not overly so