Market Update

FNMA 30-YR 4.5%

Previous close 101.030
Opened Down 0.09bp @ 100.938

Key Economic Data:

EUR / USD 1.3483 Down 0.0004
USD / JPY 83.9053 Up 0.1390
GBP / USD 1.6016 Down 0.0110

OIL 84.98 Up 0.66
Gold 1,375.50 Up 1.40

Key Economic News:

Core Indexes Surge; Jump in Starts All in Multifamily
Core producer price indexes surge at both finished and intermediate goods stages of processing, with no single component responsible for these significant upside surprises. Housing starts also rise more than expected, but increase is entirely in multifamily sector and appears due to efforts to start construction before changes in building codes.

KEY NUMBERS:
Producer price index +0.8% in Jan (mom, +3.6% yoy) vs. median forecast +0.8%.
Ex food and energy +0.5% in Jan (mom, +1.6% yoy) vs. median forecast +0.2%.
Housing starts +14.6% in Jan (mom, -2.6% yoy) vs. median forecast +1.9%.
Permits -10.4% in Jan (mom, -10.7% yoy) vs. median forecast -10.9%.

MAIN POINTS:
1. The core indexes of the producer price index surged in January-up 0.5% for finished goods and 1.0% for intermediate goods. In the case of the finished goods component, the increases were sprinkled widely enough that no single factor can be blamed. Scanning the report, pharmaceuticals, tires and tubes, sanitary paper products, toys and games, sporting goods, commercial furniture, and truck trailers all posted monthly increases of 1% or more. In the intermediate sector, prices of industrial chemicals accounted for roughly ¼ of the 1.0% increase, according to the Bureau of Labor Statistics. Data for prior months were revised to update seasonal factors.

2. Although this was a huge and unexpectedly diverse increase in the core finished goods index, we would be reluctant to make much of it in terms of implications for core consumer inflation, as correlation between the two have been much weaker in the past 25 years than before. Surprisingly, food and energy were fairly tame, rising 0.3% and 1.8%, respectively.

3. Housing starts rose 14.6% in January to 596k, as a 77.7% surge in multi-family starts outweighed a 1% drop in single-family starts. Moreover, there were small downward revisions to December. Permits for new construction, however, fell 10.4%. In particular, permits for multi-family houses-which tend to have most predictive power for future housing activity-slumped by 23.8%. As noted last month, permits rose sharply at year-end 2010 to beat changes in building codes that went into effect in several states; this had a pronounced effect on the multifamily figures that will be fleeting.

9:15: Industrial production and capacity utilization for Jan...a decent gain? Although payroll gains in January were disappointing overall, the manufacturing sector managed to add 49,000 jobs. This plus an uptick in the workweek in that sector suggests another decent increase in industrial output, despite the poor weather.
On production, median forecast (of 80): +0.5%, ranging from -0.5% to +0.9%; last +0.8%.
On capacity utilization, median forecast (of 66): 76.3%, ranging from 75.4% to 78.00%; last 76.0%.

14:00: Minutes to the Jan 25-26 FOMC meeting...not as boring as the statement. Although the meeting itself did not produce any material surprises, the markets will nonetheless read these minutes carefully. The committee probably marked up its forecast for near-term growth. We'll also be interested in whether more members feel that the longer-run sustainable level of unemployment has moved up and in any color on the range of views about future policy.

Advice:

I would float and lock at the end of today, if the market permits.