MBS MID-DAY: Battling Back From Morning Weakness

It's been an uncharacteristically volatile morning for bond markets considering the economic calendar and the day of the week.  We've had PPI, Industrial Production, and Consumer Sentiment.  These reports don't typically elicit much of a response.  While today was no exception for Consumer Sentiment, the other 2 reports resulted in some movement.

PPI came in a bit hot.  Theoretically, this means that prices are higher at the producer level.  I say "theoretically" because it's very hard to see exactly what this report measures any more.  BLS is happy to try to explain it (here), but it doesn't seem to be in English.  In today's example, BLS attributed the hotter inflation to "guestroom rental" prices.  It's anyone's guess how that has anything to do with producer prices, yet headlines abound that cast this data in the light of "wholesale costs."  So rich people are charging other rich people more for airbnb?  And that's producer-level inflation?  OK, whatever...

Moving on to a more tangible report, Industrial Production was much stronger than expected (+0.6 vs +0.3 forecast).  Whereas the PPI response arguably drew on weakness in Europe, this report had a clear negative impact of its own accord.  The selling carried Treasuries and MBS to their worst levels of the day by 9:40am, but then the magic happened.   The selling just stopped.  There were no substantive headlines at the time and no major correlations in play, except perhaps Crude Oil (which topped out at the same time).  There was simply a flurry of big trades at 9:37am and that was that.  Bonds have been improving ever since and are now close to unchanged levels on the day.

Incidentally, those big trades came in right as yields hit the upper edge of the trend channel in this morning's chart.