BondSquawk

By Maulik Mody – Bondsquawk.com

December 15, 2010

Another set of economic releases today suggest that the recovery might be gaining momentum, fueled by expansion in manufacturing. After contracting last month (negative 11.1) for the first time in over a year, the Empire Manufacturing index jumped to 10.57 during December. The index, which reflects production in the New York region, increased more than economist forecasted, suggesting that manufacturing may contribute towards speeding up the recovery.

Big gains the prices paid component and shipments were the key contributors to the rise in the index. New orders also increased as did the prices of the goods sold. “Future indexes were generally at high levels – a sign that conditions were expected to improve over the next six months”, said the report released by the New York Fed. However, employment was weak as the number of employees gauge entered negative territory for the first time in a year. It is worth noting that in the latest Beige Book, New York was the only district where manufacturing activity was reported to have weakened, while manufacturing activity continued to expand in almost all Districts.

The Consumer Price Index grew less than forecast in November, gaining 0.1% after remaining flat for prior three months. Food and energy prices came in weaker than forecast, both gaining 0.2%, while the core index level was in line with expectations. Although gasoline prices increased 0.7%, the increase failed to transfer to the cost of other commodities. Cost of services rose 0.1%, while housing prices remained flat. Apparel retail prices gained 0.2%, while medical care inflation increased a modest 0.1% following a 0.2% gain in October and 0.6% the month before.

BNP Paribas said the following in an email to clients today. “Indeed it continues to be the case that softness in prices is coming from goods and services prices other than housing which had driven much of the downward trend over the past two years. On balance we think that core inflation will remain in the subdued territory it has been in given the lack of improvement in wages, employment and consumer purchasing power. We do look for headline inflation to be pushed higher by energy and food prices in coming months despite the downward surprise in those categories today.”

Industrial production increased 0.4% during November, beating expectations of a 0.3% increase. The reading follows a revised reading of a 0.2% fall in production, which was previously reported to be unchanged. Computer and electronic items’ production, which increased 1.1% during November, acted as the chief contributor to the recent gains. Utilities production also gained considerably, lead by a 1.3% and 6% expansion of electric and natural gas respectively. Capacity utilization increased to 75.2%, coming in stronger than expected.

Among other releases, mortgage applications fell 2.3% for the week ended Dec 10. Purchases fell 5% after a 1.8% rise the week before, while refinancing dropped 0.7%. The 30-yr mortgage rate rose for a fourth straight week, now at 4.84% as opposed to 4.66% the prior week. The National Association of Home Builder’s Housing index was unchanged at 16 during December. The flat readings indicate that new constructions will remain at the current depressed levels.

Stocks were trading higher as of noon. NASDAQ was 0.3% higher at 2634, while the S&P was flat at 1241. Treasuries pared some of its losses since yesterday as yields slipped. The 2-Yr traded 2 bp lower at 0.63%, and so did the benchmark 10-yr note at 2.36%. The Long Bond fell as its yield pushed 3 bp higher to 4.56%.