MBS MID-DAY: Weak Data Offsets Overnight Losses for Rates

MBS Pricing Snapshot

- Industrial Output -0.1 vs +0.2 forecast
- Capacity Use Rate 78.1 vs 78.3 forecast
- Manufacturing Output +0.3 vs +0.3 forecast
- Mining Output -1.6 vs +1.0 forecast
- Utilities -1.1 vs +4.5 forecast
- Market Reaction: just a few more ticks of positivity for bond markets, tempered somewhat by the fact that manufacturing output was in line with the forecast. Treasuries turned green. Fannie 4.0s turned green. Fannie 3.5s are a tick away. Looks like there's some resistance overhead at 101-15.

Industrial production edged down 0.1 percent in October after having increased 0.7 percent in September. Manufacturing production rose 0.3 percent in October for its third consecutive monthly gain. The index for mining fell 1.6 percent after having risen for six consecutive months, and the output of utilities dropped 1.1 percent after having jumped 4.5 percent in September. The level of the index for total industrial production in October was equal to its 2007 average and was 3.2 percent above its year-earlier level. Capacity utilization for the industrial sector declined 0.2 percentage point in October to 78.1 percent, a rate 1.1 percentage points above its level of a year earlier and 2.1 percentage points below its long-run (1972-2012) average.

The overnight session was remarkably straightforward and uneventful. Bond markets weakened in a linear fashion the entire time, and in light-to-moderate volume. 10yr yields moved from 2.695 to 2.733 by the time this morning's 8:30am data hit.

The NY Fed's Empire State Manufacturing Index came in significantly weaker than expected, putting an end to the overnight trend. More accurately, it confirmed that putting an end to the trend was justified (because the move was already underway after the 8:20am CME open). From there, it certainly added emphasis.

10's are now back down to 2.7033 and Fannie 3.5s are up to 101-13--both significantly better than earlier this morning, but both still just barely in negative territory on the day. Industrial Production data is coming up in 2.5 minutes.

- Import Prices -0.7 vs -0.4 forecast
- Export Prices -0.5 vs +0.1 forecast
- Petroleum prices -3.6 vs +0.6 previously, biggest drop since June 2012

U.S. import prices declined 0.7 percent in October, the U.S. Bureau of Labor Statistics reported today, led by lower fuel prices. The October decrease in overall import prices followed comparatively modest advances in each of the previous 3 months. Prices for U.S. exports fell 0.5 percent in October, after a 0.4 percent increase the previous month.

The price index for overall exports decreased 0.5 percent in October, resuming a downward trend following a 0.4 percent increase the previous month. Prior to September, export prices last advanced in February when the index rose 0.7 percent. Export prices also fell over the past 12 months, declining 2.1 percent, the largest year-over-year decrease since a 2.1 percent drop for the year ended in June 2012. The last time the index fell more than 2.1 percent was a 3.6 percent decline between October 2008 and October 2009.

- Business Conditions -2.21 vs +5.0 forecast
- Employment Index 0.0 vs 3.61 previously
- New Orders -5.53 vs 7.75 previously, 1st contraction since June

Reaction: 10yr yields down roughly 2bps. Fannie 3.5 up 6 ticks. This is a 2nd tier data release and the medium-sized movement is appropriate for the size of the miss.

The November 2013 Empire State Manufacturing Survey indicates that manufacturing conditions weakened somewhat for New York manufacturers. The general business conditions index fell four points to -2.2, its first negative reading since May. The new orders index also entered negative territory, falling thirteen points to -5.5, and the shipments index moved below zero with a fourteen-point drop to -0.5. The prices paid index fell five points to 17.1, indicating a slowing of input price increases. The prices received index fell to -4.0; the negative reading was a sign that selling prices had declined—their first retreat in two years. Labor market conditions were also weak, with the index for number of employees falling four points to 0.0, while the average workweek index dropped to -5.3. Despite the negative readings registered by many of the indexes for current activity, indexes for the six-month outlook continued to convey a strong degree of optimism about future business conditions.

Supplementary questions in the latest survey focused on recent and expected changes in the prices paid by firms for several major budget categories, including wages, employee benefits, insurance, energy, and other commodities. Manufacturers, on average, predicted that prices paid for most budget categories would increase at a somewhat faster rate in calendar 2014 than in 2013. Prices paid overall were reported to have risen 3.4 percent on average in 2013 and were expected to increase 4.0 percent in 2014. When asked about expected changes in the prices they charge, firms predicted an average increase of 1.8 percent in 2014. For more details, see the full supplemental report.