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Dismal Industrial Production Figures Undermine Dollar and Bond Yields

Posted by Joseph Trevisani on Apr 15, 2016 5:16:07 PM

American industrial output dropped sharply and unexpectedly in March as manufacturing production fell by the most since February 2015 confirming that an uptick in industry sentiment has yet to reach the factory floor. 

Industrial production fell 0.6 percent and a negative revision to February also brought it down to -0.6 percent, reported the Federal Reserve on Friday.

Production, which is the output of manufacturing, mining, quarrying (including oil drilling) and public utilities, has declined in five of the last six months and in nine of the last twelve. Economists had forecast a 0.1 percent decline.

Output was 2 percent lower in March than a year earlier, the weakest annual figure since December and the seventh straight month of decline.  U.S. industrial production has never fallen for seven months in a row without the economy being in recession. Production data goes back almost 100 years to 1919. 

Manufacturing output, which comprises 75 percent of industrial production and about 12 percent of the economy, skidded 0.3 percent in March, well below the 0.1 percent median prediction.  February's reading was revised down to -0.1 percent from 0.1 percent. The decline in factory volume was driven by a 2.8 percent plunge in motor vehicle production, led by a 4.1 percent decline in the manufacturing of heavy duty trucks.

Factories have been under pressure for more than a year from declining exports, hit by the strong dollar and weakening overseas economics. American household demand has also recently turned south as retail sales fell unexpectedly in March and have not advanced since December.  

Inventories are also a source of concern for businesses. The overall inventory to sales ratio reached 1.41 in March, the highest it has been since 2009, indicating that firms may have to reduce orders until the backlog of goods is cleared. 

In seeming contradiction to the inventory build, the Institute for Supply Management reported in its purchasing managers’ survey for March the biggest jump in the new orders index in over ten years. 

The dollar fell against the euro and the yen for the first time in four sessions after the report, though neither moved outside the restricted range of the past week. 

Treasury yields dropped as the softening U.S economic picture makes the chance of a Fed rate hike in June less likely.

The return on the 10-year Treasury dropped 4 basis points to 1.7535 percent and the 2 year also shed four points to 0.7295 percent. 

Consumer confidence fell in April to the weakest level in seven months.

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg

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