The bond market has rallied a touch compared to yesterday’s close, likely due to a number of factors.

US data betrayed that country’s difficulty in maintaining forward momentum. Industrial Production for May was up 0.1% (market expected +0.2%), while Capacity Utilization was stagnant at 76.7% (same as April, and lower than expectations for 77.0%). Also, the Empire Manufacturing Index, a survey of manufacturers in a variety of industries, came in at -7.79 (market expected +12.00; positive numbers indicate expansion, negative readings indicate contraction), only the second negative reading in two years. In aggregate, these US numbers are bearish.

US Inflation Year over Year was a bit higher than expected (3.6% vs. 3.4%), primarily due to rising energy and food costs (excl. Food & Energy, CPI grew 1.5% vs. exp. of 1.4%). Of course, this reduces discretionary spending, which in turn hinders the recovery.

In Canada, Manufacturing Sales growth of -1.3% for May ‘beat’ expectations of -1.4%.

Globally, civil disobedience in Greece is getting a lot of airtime today as that country’s leaders debate the merits of the austerity-for-cash offer made by the EU/IMF/ECB. In combination with disagreements between Germany and the ECB as to who bears the costs of such a bailout means that the resolution of the situation remains disappointingly uncertain.

Rates are several basis points higher this morning as the data and economic outlook have improved on several fronts today.

In Canada, the Capacity Utilization Rate for the 1^st quarter of 79.0% was well ahead of expectations of 77.2%, and the reading for Q4 2010 was revised upward somewhat.

In the US, May Retail Sales fell 0.2%, but were slightly better than the market had projected.

Finally, Industrial Production and Retail Sales numbers out of China were better than expected, and that has generated a more positive tone globally.

The rest of the week includes the following economic releases:

Canada: Manufacturing Shipments (Wed), Wholesale Trade (Fri)

US: CPI, Empire State Manufacturing Index, Industrial Production & Capacity Utilization (Wed); Initial and Continuing Jobless Claims, Housing Starts & Building Permits, Philadelphia Fed (Thu); Consumer Sentiment, Leading Indicators (Fri)

The recent bond market rally continues this morning as more disappointing data comes out of the US.

523,000 Housing Starts (annualized) for April fell well short of the modest 569,000 that were expected [this series is normally between 1.5 to 2.0 million, but has been stuck below 700,000 since late 2008]. Also, Building Permits for April were 551,000 (annualized), also well short of the 590,000 the market was hoping for.

Additionally, Industrial Production did not grow during April (market expected +0.4%) and Capacity Utilization of 76.9% was also below expectations. While some commentators are pointing to Japan-related supply chain disruptions (which are valid), I’m pretty sure forecasters were aware of the situation in Japan when they cobbled together their numbers.

In any event, the above data are quite weak, and the market’s appetite for risk this morning is reflective of that.

Data for the rest of the week includes:

-          Canada: Wholesale Trade (Wed); CPI, Retail Sales (Fri)

-          US: Existing Home Sales, Leading Indicators, Philly Fed, Initial and Continuing Jobless Claims (Thu)

A bond selloff this morning has been catalyzed largely by a large “beat” in the US Housing Starts numbers for January. On an annualized basis, Housing Starts of 596k were much higher than the 539k that was expected, representing MoM growth of 14.6%. The upside was due to the multifamily segment, which is quite volatile by its nature. [I have included a chart which puts this uptick in perspective relative to the past]

Other US releases indicated that Producer Prices as measure in the PPI are rising faster than expected, +0.5% MoM (vs. exp +0.2%) when excluding Food and Energy.

Both of the above would tend to lead rates higher, while some balance is provided by weak Industrial Production (-0.1% vs. +0.5% expected) and Capacity Utilization (76.1% vs. 76.3% expected) numbers.

Canadian economic data was limited to Leading Indicators (Jan) and Manufacturing Sales (Dec), both of which fell short of expectations.

In spite of the mixed nature of the data, the housing starts number seems to be stealing the show this morning.

Lots of Tier I data is out over the next two days, including US CPI (Thu) and Canadian CPI (Fri).

The bond market has rallied modestly this morning following the selloff late yesterday.

Largely responsible for stabilizing yields this morning are the US CPI numbers for November, which at 0.1% MoM, were lower than market expectations for 0.2%. These serve as a reminder that while the market has moved to price in certain events, the inflation is not yet evident.

Other positive data in the US include the Empire Manufacturing Index for December at 10.57 (exp. 5.0), growth in Industrial Production for November of 0.4% (exp. 0.3%), and an uptick in Capacity Utilization to 75.2% (exp. 75.0%).

The only Canadian data out this morning was October Manufacturing Sales which were up 1.7% (exp. 1.0%).

In summary, lots of data suggesting the economy is moving in the right direction, but if inflation lurks, it remains well hidden.

The bond market has rallied a bit this morning as the result of a number of factors. Overseas, fears of monetary tightening in Asia (particularly China) and the moderation in growth that would surely follow has caused commodity prices and equity markets to decline overnight. This shift away from risk assets has helped lift the bond market somewhat. Additionally, the increasingly prevalent headlines related to Ireland and other fiscal challenges in Europe are constantly adding to concerns about the strength of the global growth story.

Some inflation (deflation) data down south also has added fuel to this morning’s bond market rally. The US Producer Price Index grew 0.4% in October (exp. was +0.8%). Excluding food and energy, the ‘core’ PPI declined 0.6%. Other measures of the PPI also came in lower than expected. Also, Industrial Production and Capacity Utilization came in worse than expected. Both of these metrics are at historically poor levels and need to pick up (particularly Capacity Utilization) before important components of growth such as business investment can really become a meaningful contributor to growth.

Closer to home, Canada can put a notch in the “not as bad as we thought it would be” column. Manufacturing Sales in September declined by 0.6%, somewhat better than the -0.9% consensus forecast.

Rates have remained low and range-bound for some time now as the market digests a stream of generally soft data which has raise questions related to the robustness of the economic recovery.

In terms of data that was out today in the US we saw several measures of the Producer Price Index at or slightly above expectations, while Housing Starts “rose” in July due to a downward revision in the June number. Adding to housing concerns in the US, Building Permits declined 3.1% in July. Positives include an increase in Industrial Production +1.0% (+0.5% had been expected) as well as a greater than expected increase in Capacity Utilization to 74.8%  from 74.1%.

Canadian data today was limited to June Manufacturing Sales which  rose 0.1% (-0.5% decline had been expected).

The big news this week is on Friday when we get the Canadian CPI numbers for July.