(Reuters) - A gauge of factory activity in the U.S. Mid-Atlantic region contracted for a second month in a row in September, but the rate of decline moderated from a steep drop the month before, a survey showed on Thursday.

The Philadelphia Federal Reserve Bank said its business activity index improved to minus 17.5 from minus 30.7 in August. That still missed economists' expectations for minus 15.0, according to a Reuters poll.

Any reading below zero indicates contraction in the region's manufacturing. The survey covers factories in eastern Pennsylvania, southern New Jersey and Delaware.

It is seen as one of the first monthly indicators of the health of U.S. manufacturing leading up to the national report by the Institute for Supply Management.

(Reporting by Leah Schnurr, Editing by Chizu Nomiyama)

OK.... Big scary market movements this morning. They have nothing to do with our domestic economic data. No... No one cares about CPI being slightly higher than expected. There were no sharp movements in bond markets and no major volume spikes between 830 and 835am. If a piece of data was a driver, there would be.

Let's break this down... There were 2 spikes: a small one at 835am-ish and a bigger on at 9am. The 9am spike we can obviously attribute to the European Central Bank's announcement that it will be providing dollar-based liquidity via 7 day repo's beginning in early October. Essentially, this is confidence builder for European markets as it suggests they'll have the liquidity to get through the rest of 2011. European funding concerns are a BIG deal and these repo operations are perhaps seen as a sign of the times of a burgeoning ECB involvement.

Without putting too fine a point on it, folks are thinking of the ECB's current role in Europe like the Fed's role in the US in 2009/10. We all saw the sugar high that Fed Involvement gave domestic markets so why not assume Europe might get a similar sugar high. It's not so much that today's announced operation is "huge" in and of itself, but again, a potential indication that the ECB will continue taking a Fed-like role with respect to propping up EU markets. Good for stocks at home and abroad.... Bad for bonds...

As far as the earlier mini-spike, either there was early word about the ECB repo ops around 835 (conspiracy theory!) or more likely, bond markets observed stock futures resilience.

Either way, 10yr yields appear to be leveling off just under 2.10 despite an ongoing surge in stocks (so we'll go with ECB explanation..) MBS are 8 ticks down in 4.0's at 104-03 and 12 ticks down in 3.5's at 101-01. Rate sheets will be worse, and possibly delayed. As expected, MBS are tightening aggressively into TSY weakness

Empire State Manufacturing:

- Business Conditions Index -8.82 vs -7.72 in August (-4.0 estimate)
Employment component was -5.43 vs +3.26 last
-index lowest since 11/10, employment since 9/09
-bond-market-friendly

Consumer Price Index

- +0.4 pct headline vs +0.2 pct consensus.
- Excluding food and energy, +0.2, in line with consensus.

Current Account Deficit

- $118 bln vs consensus of $122.5 bln

Jobless Claims

428k vs 427k previous and 410k consensus.
-4 wk avg rose to 419,500 from 415,500
-continuing claims fell to 3.726 mln from 3.738 mln.

All in all, this data was bond-market friendly, NY Fed and Jobless Claims especially. CPI was a bit of a mixed bag, but perhaps leaned to the negative side as far as it's implication on MBS prices. The Budget Deficit is not a market mover this AM.