MBS Pricing Snapshot

10yr yields have fallen just over 1bp after the Industrial production numbers. MBS made more pronounced gains with Fannie 4.0s now up 7 ticks on the day at 103-17, but we'd emphasize that those gains are mostly a factor of where the chips have fallen with respect to liquidity coming on line.

In other words, there just wasn't enough trading earlier in the morning to have much confidence in the levels. Buyers and sellers came closer together in price right around the 9:15am data and have improved with Treasuries since then.

Apart from extra low volume, the paradoxical reaction to stronger Industrial Production data needs some explanation. Conventional wisdom suggests bond markets should have moved into weaker territory if an economic report is that much stronger than expected, but there are two notably "yeah buts" in the data.

First of all, the "Capacity Use" component of the report was tremendously stronger than expected. This detracts from the potency of the Industrial Output component. To oversimplify, a higher capacity use rate means that workers are making more efficient use of resources, tools, and technology in order to increase output. The tacit implication is that increased output is NOT coming from increased labor hours and/or hiring.

In a similar vein, Utilities accounted for more than their usual share of the improvement in output. Naturally, this isn't a sector where increased throughput has any sort of direct affect on labor markets (each percentage point of increase in electricity you use certainly isn't creating the same percentage increase in employment at the utility company, for instance).

All that said, there's nothing about the morning's movement that necessarily proves that data has much mattered at all. Again, most of the MBS rally is about liquidity finding its footing, and Treasuries haven't really rallied that much. The amount they have rallied could be just as attributable to tradeflows waiting for a more liquid time of day.

- Industrial Production +1.1 vs +0.5 forecast
- Largest gain since Nov 2012 - Capacity Use Rate 79.0 vs 78.4 forecast< 78.2 previously
- Utilities +3.9 vs -0.3 previously
- Market Reaction: bond markets improving despite stronger data. The two counterpoints within the data are the fact that capacity utilization jumped by an extreme 0.8 pct, and crushing the post-collapse highs. Utilities also played a big role in the improvement. Both of these factors mitigate the positive economic statement made by the increase in the headline Industrial Production.

Industrial production increased 1.1 percent in November after having edged up 0.1 percent in October; output was previously reported to have declined 0.1 percent in October. The gain in November was the largest since November 2012, when production rose 1.3 percent. Manufacturing output increased 0.6 percent in November for its fourth consecutive monthly gain. Production at mines advanced 1.7 percent to more than reverse a decline of 1.5 percent in October. The index for utilities was up 3.9 percent in November, as colder-than-average temperatures boosted demand for heating. At 101.3 percent of its 2007 average, total industrial production was 3.2 percent above its year-earlier level. In November, industrial production surpassed for the first time its pre-recession peak of December 2007 and was 21 percent above its trough of June 2009. Capacity utilization for the industrial sector increased 0.8 percentage point in November to 79.0 percent, a rate 1.2 percentage points below its long-run (1972-2012) average.

A better headline for this update would be "Bond Markets POSSIBLY Stronger." Although Treasuries and MBS are in positive territory so far today, it's more incidental than determined as trading activity is unsurprisingly light.

Even into the end of last week, this phenomenon had begun to play out (and we began harping on "exhaustion"). It's even worse so far this morning as MBS buyers and sellers (lucky if there's one on either side) are so far apart in price they need binoculars to communicate. That means you might see big 2-3 tick adjustments that don't really mean anything.

Normally, we'd say that the directional cues for rates could at least be seen in Treasuries, but things have been fairly equivocal there so far as well. As of this moment, 10yr yields are right around 1bp lower on the day after well-contained, low volume overnight session. Fannie 4.0s are indicated at 103-11, which is a tick higher vs Friday at 5pm.

The Empire State Manufacturing Index came out slightly weaker than expected at 8:30am and there was no bond market reaction.

- Empire State Index +0.98 vs +4.75 forecast
- Employment Index 0.0 vs 0.0 previously
- Market reaction: barely any so far. The market is dead, with very little trading going on in Treasuries or MBS. The implication of the data would be slightly positive, but while Treasuries have picked up around half a bp, MBS are lower, simply due to illiquidity.

The December 2013 Empire State Manufacturing Survey indicates that manufacturing conditions were flat for New York manufacturers. The general business conditions index rose three points but, at 1.0, indicated that activity changed little over the month. The new orders index inched up, but remained negative at -3.5, while the shipments index rose to 7.7. The unfilled orders index fell to -24.1, and the inventories index declined twenty points to -21.7; both indexes reached their lowest levels since 2009. The prices paid index was little changed at 15.7, and the prices received index climbed to 3.6. Labor market conditions remained weak, with the index for number of employees holding at 0.0 for a second month in a row and the average workweek index dropping six points to -10.8. Indexes for the six-month outlook generally conveyed a fair degree of optimism about future conditions, though to a lesser extent than in the November survey.

This month’s supplementary questions asked manufacturers to assess how much of a problem certain business issues were for their firms and whether the issues were expected to become more or less of a problem in the year ahead. As in earlier surveys, the issue cited most frequently, by far, as a major problem was the cost of employee benefits. Moreover, fully 80 percent of respondents expected that this would become even more of a problem a year from now. Finding qualified workers emerged as the second most widespread problem, eliciting a considerably larger degree of concern than in earlier surveys. This, too, was expected to become more of a problem in the year ahead by a wide margin. In contrast, the availability, cost, and terms of credit were seen as relatively minor problems that would become even less consequential over the next year. For more details, see the full supplemental report.