Of all the reports silenced by the government shutdown, Retail Sales was probably the most missed. It didn't help that December is a rather important month for such data. December's report finally arrived today, and it made waves.
While there has been some question as to how quickly markets would be willing to "trust" the economic data affected by the shutdown, traders were instantly willing to react in this case for 2 reasons. First off, the Census Bureau simply told markets that its collection efforts were solid right on the front page of the report. But even more important, in this case, was the size of the miss, with sales falling at their fastest pace since 2009. It was also a rare "down December" for the series, with 2014 being the only other example during this expansion cycle.
Even though there was almost certainly an impact on sales from the government shutdown (whether from government employees holding back on spending due to a lack of a paycheck or other consumers holding back due to shutdown-related uncertainty), traders weren't interested in trying to guess how big that impact should be. These numbers are here today, and they were bad enough to be worth trading.
10yr yields dropped 3bps in fairly short order after improving by nearly 3bps in the overnight session. Fannie 3.5 and 4.0 MBS gained 7 ticks (.22) and 4 ticks (.125) respectively. Those levels held up without much fuss for the rest of the day. In the bigger picture, bonds rallied as much as possible without doing anything to threaten the existing consolidation range.