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Good Morning…

Yesterday, Construction Spending for November was reported at -.6% versus an expected decline of 1.4% and October’s results were revised to -.4% from -1.2%. Residential construction continued to provide a big drag while non-residential spending showed a slight increase. The big driver in spending was government construction which should only get larger in the coming months and quarters as the Obama Administration puts into play its economic stimulus plans.

Separately, as President-elect Obama spent his first day in Washington, details of his economic plan are beginning to leak out. At the moment it looks like the President-elect prefers a plan in the $800 billion range, with about 40% of that number in the form of tax relief. There have been numerous comments suggesting that significant infrastructure building programs will be put into place to rebuild roads and bridges, possibly update the nation’s power grid and create jobs. Also, financial aid will most likely expand beyond financial institutions and auto producers to states and other municipalities.

On Monday, the Fed’s actions in MBS space were widely broadcast as they came in and purchased good size across the 30yr coupon stack. It was noted by dealers that some purchases centered on FNCL 6%, Gold 4.0% and 4.5% and GNMA 4.5%. Fannie MBS traded well throughout the day with 3pm closing prices showing January FNCL 30yrs at 99-30 for 4.0%, 101-15+ for 4.5%, 102-13 for 5.0% and 102-27 for 5.5s. With $500b to spend over the coming quarters, it’s anticipated that the Fed will be very active, keeping mortgages well bid and investors engaged as they try to stay ahead of the Fed. Origination flows were on the lighter side with hedging activity predominantly in FNCL 4s and 4.5s across months. The next settlement for agency MBS is January 13th, therefore we’re anticipating a pickup in specified sales, dollar rolls and coupon swap this week.

Today’s economic releases begin at 10 am with the ISM non-manufacturing composite (Dec) expected to decline to 36.5 from November’s 37.3 post. Factory Orders (Nov) follow with an expected decline of 2.3%, an improvement from the -5.1% drop in October. Pending Home Sales rounds out the 10 am releases, not surprisingly a decline of 1% is forecast. Later in the day, the Fed releases its minutes from the December 16th FOMC meeting.

This morning mortgages are opening relatively unchanged with FNCL 4s at 100-03, 4.5s at 101-16+ and 5s at 102-14. Treasuries show the 2yr at .80% (-02+/32), the 5yr at 1.69% (-01+/32), and the 10yr at 2.49% (-04/32).

Economic Calendar: