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Why economic expansion means bond prices should fall

Phalguni Soni

Key highlights driving stocks and ETFs: Janet Yellen and JOLTS (Part 9 of 9)

(Continued from Part 8)

Index of Industrial Production

The Federal Reserve’s monthly index of industrial production and capacity utilization rates will have released simultaneously on Friday and covered manufacturing, mining, and electric and gas utilities. The production index measures real output and is expressed as a percentage of real output in a base year—currently 2002. Industrial production and capacity utilization are considered coincident indicators, as changes in them usually accompany changes in GDP and overall economic activity.

In its last release in January, industrial production rose 0.3% for the month of December—its fifth consecutive monthly increase—primarily due to increases in consumer goods output, both durable and non-durable, as well as construction. For the fourth quarter as a whole, industrial production advanced at an annual rate of 6.8%—the largest quarterly increase since the second quarter of 2010. Gains were widespread across industries.

If these indicators are rising, as appears to be the case, the economy is expanding, which means the Fed taper will likely continue and, other things remaining constant, bond prices will fall in an increasing interest rate environment.

To see how the releases we’ve covered in this series affect mortgage REITs and homebuilders, see the Market Realist series Mortgage applications: Must-know outlook for REITs and builders.

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