CPI in December fell in-line with expectations, down -0.4% MoM vs. -0.3% prior (consensus -0.4%), for the largest monthly decline since 2009. Energy prices plunged -4.7% in December, for the biggest monthly drop since late 2008 and the gasoline index continued to plummet, down -9.4%. Year-over-yearCPI is up +0.8% vs. +1.3% prior (consensus +0.7%). Excluding Food and Energy, CPI came in flat for December following a +0.1% boost in November. Industrial Production decreased -0.1% in December following a +1.3% gain in November. The decline in December’s Industrial Production reflected a sharp drop in the output of utilities; excluding utilities, Industrial Production rose +0.7%. Capacity utilization for the industrial sector decreased -0.3% in December to 79.7% (consensus 79.9%).
Yesterday, treasuriesrallied as declining commodity prices, a persistently strong dollar, speculation that the ECB will engage in QE by buying sovereign bonds, and Switzerland’s decision to abandon its currency cap smothered the outlook for inflation and fueled demand for safe haven assets. The Swiss Bank lowered the benchmark interest rate to -0.75% from -0.25%. Last week Obama announced a -50 bps reduction to annual MIPs, and as a result we may see faster prepayment speeds in the following couple months and a boost to FHA originations. The 10-Year noterallied +23 ticks, pulling yields down -7.8 bps to break through resistance at 1.759%. The coupon stack compressed, tightening the most in 4/3.5 swap, down -3.25 ticks. MBSunderperformedtreasuryhedges by 1-6.625 ticks led by the 3.0% (6.625 bps wider), short term Volatility increased 1-2 ticks, and longer term Volatility edged up 1/4th of a tick. The curve bull flattened, with 2s10s down -1.9 bps to 132.5, pulling the 20 day average to 144.5 vs. 156.5 prior. Long-end yields fell, pulling the 30-Year bond down -5.3 bps to 2.397%. Even with the 30-Year bond at record lows, treasuries are still looking attractive to global investors looking at negative returns on sovereign debt nations such as Germany and Switzerland. The 30-Year current coupon increased to 2.57% vs. 2.51% prior, and the 15-Year fell -1 bps to 1.84 vs. 1.85% prior. The G2/FN swap declined 1-3 ticks in the production coupons led by a -3.0 tick decrease in the 3.0% coupon. The G2/FN 3.5% swap declined to 0-052 vs. 0-066 prior. Today treasuries slipping following the in-line CPI data, with 2s10s -1.9 bps flatter.
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