Mortgage backed securities (MBS) prices are falling (rates rising) as equity markets surge on positive signs that the recession may be abating, reducing demand of fixed income assets, like MBS, and stoking concern inflation could increase; FNMA 4.5% coupon 100.06bps, -80bps. The DOW is up 175pts (2%) after release of economic reports reinforcing beliefs that the economy may be bottoming. Personal Income unexpectedly jumped 0.5% in April, largely due to increased government social benefit payments reflecting provisions of the American Recovery and Reinvestment act of 2009. Consumer Spending continued to fall, down 0.1% as concern over rising unemployment and record wealth destruction prompted households to boost savings rates in April to the highest level since 1995. The ISM Manufacturing Index moved higher, from 40.1 in April to 42.8 in May, and above the 41.2 threshold the ISM associates with a shrinking economy. The biggest news in the report is new orders rising above 50 for the first time in 17 months. Also significant is a big decline in inventories, suggesting the correction is complete, and that a build in inventories wil be necessary to meet production needs. Construction Spending unexpectedly surged 0.8% in April, led by a 1.8% increase in private non-residential outlays and a 0.7% jump in private residential spending. The Fed's program of purchasing MBS and Treasuries, to keep low mortgage rates so people can refinance to reduce payments and stay in their homes, have enabled 2 million homeowners to refinance who otherwise would not have been able to. To illustrate the negative impact of the recent rise in rates, at 5.25% 43% of borrowers can benefit from refinancing, while at 4.75% 87% of borrowers will benefit. That was half the pool being emptied.

Mortgage backed securities (MBS) prices are lower (rates higher) after yesterday's substantial gains due to an enormously strong 7yr note auction that drew higher demand from indirect bidders (foreign central banks) than in previous auctions; FNMA 5.0% coupon 101.89bps, -3bps. Expectations that the Fed will keep interest rates low have increased; traders now see a 46% chance of a rate hike in 2009, down from about 90% a week ago. Personal income surged 1.4%in May, more than expected, though nearly all the gain is related to temporary fiscal stimulus. Almost 50 million people received a one time payment of $250 from the American Recovery and Reinvestment Act of 2009 (thanks Barak), bolstering the consumer sector. The result is not exactly what was hoped for as the loss of household wealth caused by the housing slump promted people to rebuild their savings. The savings rate has reached a 15 year high, 6.9%, indicating the economic recovery will be slow to develop. Wages and salaries actually dropped 0.1% in May, showing the effects of mounting job losses. Consumer spending rose for the first time in three months, up 0.3%, and a sign that efforts to revive the economy may be starting to pay off. Consumer Sentiment showed a slight improvement, up 1.8 to 70.8, after rising 4 in May and 8 in April. Expectations have stalled and often point to the future direction of the index. The current condition component is improving and hopefully reflects an uptick in the labor market as the decline in housing and manufacturing slows. Requests for business loans, commercial and industrial, have fallen even as deposits have grown. Banks are using the deposits to buy bonds instead of making loans, looking to the debt market during the economic slowdown by investing in tradeable securities with the least credit risk, while waiting for interest rates and loan demand to increase. Bank purchases have helped suppress mortgage rates by supporting the price of MBS. Net income for lenders dropped 61% this year as they add to reserves, took charges from bad loans and collect less money from packaging and selling loans. Be wary today of a sell off as it is a Friday after a strong run up in prices.

Mortgage backed securities (MBS) prices are lower (rates higher), after three positive days, ahead of the FOMC policy statement due at 1115am pt and before the Treasury auction of $37 billion of 5yr notes; FNMA 5.0% coupon 101.20bps, -13bps and the low of the session. Today's 5yr note auction is the largest sale of the security since 1953. It is rare for a government auction and FOMC statement to come out on the same day, but it is neccessary due to a busy calendar of auctions to help finance the massive stimulus program. Volatility has been the market response to every Fed policy decision since December 16; selling off in January when the Fed failed to announce a debt buying program, rallying in March after release of the buyback program, sold off again in April when additional measures were not forthcoming. Stock markets, however, have responded each time with feverish buying. The concern is the liquidity injections and unprecedented borrowing will cause inflation to accelerate, endangering the prospects for a recovery. The Fed will probably reassure investors they can keep interest rates at record lows without igniting inflation, stressing the increasing slack in the economy will contain consumer prices into next year. The Fed is scheduled to purchase long term securities tomorrow and will announce next two weeks schedule of debt buybacks at noon pt today. The Mortgage Bankers Association weekly survey shows purchase applications jumped 7%, a solid improvement but from a depressed level. Refinance applications also rose 6% with activity tied to a turn back down for mortgage rates. Durable Goods Orders unexpectedly jumped 1.8% in May showing broad based strength, well above the market consensus of a 0.5% gain. The rebound in new orders was widespread, led by machinery and transportation. Excluding the transportation component, new orders posted a 1.1% rise. Year over year new orders for durable goods are down 23.3%. The gains will take time to impact production, but adds to the argument that the recession is near bottom. New Home Sales unexpectedly fell 0.6% in May to an annual pace of 342K from a revised lower 344K last month. Builder discounts failed to keep pace with the foreclosure driven slump in prices. The median sales price fell 3.4% from a year ago, but was up 4.2% from a month ago, to $221,600. Sales were down 33% from May 2008 and builders have 292K houses on the market, fewest since 2001, representing 10.2 months of supply at current pace.

Mortgage backed securities (MBS) prices continue to climb higher (rates lower), extending the rally for a fifth day, after a Labor Department report showed consumer prices rose less than forecast, easing concern inflation will accelerate; FNMA 5.0% coupon 101.86bps, +33bps. Consumer Price Index (CPI), the broadest monthly price gauge because it includes goods and services, increased 0.1% in May despite higher energy costs. The boost in energy costs was due to a 3.1% gain in gasoline prices, though partly offset by declines in natural gas. Higher energy prices restrain discretionary spending, preventing companies from passing increased costs on to customers. The "core" rate, excluding food and fuel, climbed 0.1%. The core index benefited from subdued rental prices, 40% of the total, and falling prices for public transportation, apparel and tobacco. The outlook among traders for consumer prices is 1.78% and down from a 2.23% 5yr average, reflected by the difference between the 10yr note and Treasury Inflation Protected Securities (TIPS). Mortgage applications fell to the lowest level since November, reflecting the dampening effect of rising interest rates and limited credit availability. Purchase applications fell a disappointing 3.5% last week, combined with indications of limited buying interest point to dismal home sales data at months end. The refinance index fell sharply, down 23%, with mortgage rates up about 75bps from a month ago. The jump in borrowing costs discourage homeowners from refinancing and may deepen the housing slump. The Fed is scheduled to purchase 7-10yr securities today, part of its $300 billion buyback program, after buying $6.45 billion of 3yr notes yesterday.

Mortgage backed securities (MBS) prices opened higher, reaching +20bps, only to reverse course in volatile trading after release of several economic reports and Fed Chief Bernanke's assertion that large budget deficits threaten our financial stability and borrowing at the current rate to finance the debt can't continue; FNMA 4.5% coupon 99.92bps, -2bps. 30yr fixed mortgage rates soared 44bps last week, the result of inflation expectations, reducing demand for refinancing 24% according to the Mortgage Bankers Association's weekly survey of mortgage applications. MBA purchase index did increase 4.3%, but has been flat all year and needs to keep moving up week after week before signaling stronger demand for housing. Challenger's Job-Cut Report layoff count fell to 111,182 in May vs April's 132,590 hinting at sequential improvement in labor market. ADP's employment report estimates private payrolls fell 532K in May confirming expectations for no month to month improvement in payroll contraction. ISM Non-Mfg Index edged higher only 0.3% to 44 in May, less than forecast and still below 50, indicating the economy is still slowly contracting and showing no visible improvement. New orders are falling, not rising, and backlog orders also showed a decline. These results will push back expectations for the pace of economic recovery. Factory orders rose 0.7% in April, less than forecast, after a revised 1.9% drop in March that was more than twice the previous estimate. Factory destocking continues with inventories down 1.0%, as manufactures realign to meet the lower level of demand. There are signs that efforts to purge inventories may be close to ending and that sales and production will turn around in coming months.