So far this AM

  • HANG SENG, SHANGHAI, NIKKEI, KOSPI, all higher after Chinese manufacturing data indicates expansion...6th straight month.  CAC, DAX and FTSE lower after Eurozone unemployment rate reaches 9.5% and UK PMI data is worse than expected
  • NYMEX Crude trading around $70 after hitting $69.18 yesterday. Pushed as high as $70.62 overnight.
  • Dollar stronger against basket of currencies
  • TSYs trade in below average volume overnight. Dec 10 yr futures contract prices move in tight range...mostly unchanged until 4AM. Prices spike, but fall back into range at 7AM. Most TSY buying attention is in short end of yield curve (risk aversion)
  • Rate sheet influential MBS coupons trading near yesterday's "going out" marks. Has however been a choppy morning...

Recap of yesterday

  • Chinese stocks lead global equities lower
  • Stocks ignore "better than expected" Chicago Purchase Manager's Index.  Read of 50 indicates manufacturing not contracting not expanding. S&P futures below 8/27 low.
  • Yield curve steeper. Weakness in stocks leads US TSY market through resistance, albeit in light volume. Month end index extension also helped TSYs.
  • MBS close August on good note. MBS also benefit from month end index extension (after 3pm close that is) was just too easy
  • Some lenders reprice for the better...but not all. "Choppy range" cushion built in rate rates hold stead near 5.00%. We saw several paying at 4.875
  • 4.0 MBS was star of session. Federal Reserve's buying presence combined with real money accounts moving down in coupon helped "rate sheet influential" yield spreads tighten (MBS outperformed benchmarks).
  • Seeing more seasoned pools on BWIC (bid lists) as prepayment report looms. Seasoned pools offer "up in coupon" (5.5s and 6.0s) investors protection from an unexpected increase in prepayment speeds. Unanticipated prepays = MBS enemy.

The Day Ahead

  • READ MND Day Ahead
  • Waiting for ISM Data...Economists expecting 50.5  August vs. 48.9 July
  • General tone of expected Q3/Q4 growth forcing us to be defensive of higher rates after Labor Day. Will more "better than expected" manufacturing data spur on a "cost cutting, government stimulus" third/fourth quarter equity rally? Or is that assumption already baked into stocks?
  • Construction Spending...0.0% July expected vs. 0.3% June
  • Pending Home Sales.... 2.0% July expected vs. 3.6% June
  • Domestic Vehicle Sales later today
  • Federal Reserve buying TSYs this morning. May 2012 to Nov 2013 maturities. Expecting somewhere in the range of $6 billion
  • 3.36 target on 10yr. 3.26% in event of facemelter.
  • Seasonal slowness still an goes back to work after Labor Day
  • MBS has one supportive event behind (month end index extension) and three more ahead. BUT BEWARE: rate sheet influential MBS will sell off fast if benchmark yields rise....although there is potential for further rates rallying,if econ data is better than expected we may be due a reversal of the recent rates rally.

Then again...when was the last time logic prevailed in this marketplace?