Bond Markets Improve Modestly After Industrial Production Data
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.