MBS prices are down -4/32 (FNMA 30-yr 3.5 at 101.26), above 9:45 et pricing of -5/32, but down from a high of +3/32. Favorable repricing took place. A rate cut by China, stronger than expected US economic data, and a joint program by major central banks to lower bank borrowing costs produced a large stock market rally and a decline in bonds. September Pending Home Sales rose 10% from August, which was far above the consensus forecast. Note that Pending Home Sales measure contract signings and not closings. The Fed’s Beige Book reported slow or moderate economic growth in 11 out of 12 US regions. The Dow is up 480 points. Tomorrow, Jobless Claims, ISM manufacturing, and Construction Spending will be released.

This morning the Census reported October Housing Starts, Building Permits, and Home Completions data. The absolute (unadjusted) number of housing starts decreased 6%, while single-family (SF) starts decreased 2% M/M. Both were modestly below October’s historical seasonal monthly increase of 1-3%. Total and SF permits decreased 1% and 4% M/M, total completions decreased 5%, and SF completions increased 10.5%

Mortgage prices are unchanged. Increased optimism about Italy outweighed rising bond yields in Spain and France. The new Italian Prime Minister suggested that the newly formed governing body may be in place sooner than expected, allowing them to begin the reform process. Today’s US economic data had little impact on MBS markets. Comments from Fed officials displayed the division over what the Fed should do. The Fed’s Evans, the official most strongly in favor of looser monetary policy, argued that the Fed should ease further to help lower the unemployment rate. The Fed’s Bullard took the opposite position, focusing on the risk of higher inflation from additional monetary stimulus. The Dow was up 20 points. Tomorrow, CPI and Industrial Production will be released

Mortgage Backed Security (MBS) prices are up +15/32 (FNMA 30-yr 3.5 at 101.14), which is about 22/32 higher than Friday at this time. A decline in the stock market has lifted MBS this morning. Chicago PMI declined to 58.4, below the consensus forecast of 59.0, and the lowest level since May. The Dow is down 150 points. No more economic data will be released today. Of note, there will be a Fed meeting on Wednesday, and the Employment report will come out on Friday.

Mortgage Backed Securities (MBS) prices are up +11/32 (FNMA 30-yr 3.5 at 100.26), which is about 1/32 lower than yesterday at this time. The 30-yr fixed FNMA required net yield (60 day) is now at 3.84%, the highest level since August 25, from 3.78% yesterday.

MBS markets have recovered roughly half of yesterday’s losses this morning. The September Core PCE price index, an inflation indicator closely watched by the Fed, was unchanged from August, compared to the consensus forecast for an increase of 0.1%. Core PCE was a moderate 1.6% higher than one year ago. September Personal Income rose 0.1%, which was lower than expected.

Concerns about the pace of global economic growth have hurt the stock market and boosted MBS markets. Recent economic data in the US, Europe, and China generally has been weaker than expected, and yesterday’s Fed statement confirmed the uncertain economic outlook. This morning, weekly Jobless Claims came in at 423K, higher than the consensus forecast of 415K, and holding above the 400K level yet again. The four-week average rose to 421K. The Dow is down 350 points.

Federal Reserve Chairman Ben Bernanke said Friday that central bank policymakers will take a closer look next month on whether they should take additional short-term steps to jumpstart economic growth. The highlight of his speech is that the Fed will consider additional monetary stimulus measures at its September meeting and will implement them if appropriate, but that fiscal policy changes by lawmakers are needed to help the economy and the labor market. In short, Bernanke gave no hint that the Fed will loosen monetary policy, disappointing some investors. Mortgage rates are unchanged from yesterday. 30 year fixed conventional mortgage rates are still hovering around the critical 4.00% area.

Special Update:

Late Friday, S&P, one of the three major credit rating agencies, downgraded the US debt rating. The other two agencies have continued to assign the highest rating to US debt. S&P cited the deficit reduction in the debt ceiling agreement as too little. Since this is uncharted territory, it’s not clear what will happen when markets open on Monday. Interest rates may rise, but most analysts expect the impact to be small. A volatile session will be likely.

Concerns about Europe have lifted Mortgage Backed Securities markets and hurt the stock market today. As expected, the European Central Bank (ECB) made no change in rates. The president of the ECB said that the ECB will purchase bonds again for the first time in five months, as well as instituting other programs to relieve the debt problems of weaker European countries. Regarding the economic growth outlook for Europe, the ECB president suggested that “uncertainty is particularly high”. In the US, weekly Jobless Claims came in at 400K, matching the consensus forecast. The four-week average declined to 408K. The Bank of Japan intervened to weaken the Japanese Yen, with the goal that a weak er currency would boost exports and lift the economy. The Dow is down 180 points. No more economic data will be released today.

4.25% 30 YEAR FIXED

Weaker than expected GDP data raised concerns about the pace of economic growth and lifted MBS markets. Consumer Sentiment declined to 63.7, which was close to expectations, and the lowest level since March 2009. Lawmakers were active today, but it was not clear whether any progress was made on reaching an agreement on the debt ceiling. The Dow was down 100 points. For the week, MBS prices rose about 27/32.

The debt ceiling talks will remain in the spotlight next week, and an agreement could be reached at any time. The biggest economic report will be the important Employment data on Friday. As usual, this data on the number of jobs, the Unemployment Rate, and wage inflation will be the most highly anticipated economic data of the month. Before the employment data, ISM Manufacturing and Construction Spending will co me out on Monday. Personal Income and Core PCE inflation will be released on Tuesday. ADP Employment, Factory Orders, and ISM Services are scheduled for Wednesday.