A rally just wasn't in the cards today.
Treasury market folks started the day with the mindset that
Monday's rally cannibalized whatever euphoria today's
Producer Price Index
reports might have generated. And while the headline figures were certainly friendly for the bond market, economists said that what lies underneath isn't comforting enough to shift the interest-rate outlook to something more positive.
Bonds initially popped higher on the meager 0.1% increase in June retail sales and the 0.1% decrease in the overall June PPI and 0.2% decrease in the core PPI (which excludes food and energy prices). At one point, the 30-year Treasury bond rose 7/32, but the gains didn't take, and the market spent the balance of the day drifting with the wind. Lately the 30-year Treasury bond was down 4/32 to trade at 90 24/32. The yield rose 2 basis points to 5.92%.
Plus, "there's a hesitancy to push
bond prices significantly higher in the face of a more important set of stats tomorrow," said Bill Sullivan, chief money-market economist at
Morgan Stanley Dean Witter
. He's referring to the June
Consumer Price Index
, a key indicator of inflation, released tomorrow at 8:30 a.m. EDT.
Today's key inflation indicator, the PPI, which measures inflation at the wholesale level, didn't give the market lasting solace because of sharp increases in the intermediate and crude stages of production -- which simply refers to earlier stages of production than finished goods, which the market pays the most attention to. While the core PPI for finished goods declined 0.1%, prices for core intermediate goods rose 0.4%, following a 0.2% increase in May. But on a year-over-year basis, intermediate prices are still falling at a 0.5% rate (compared to a negative 1.8% a year ago).
William Quan, senior economist at
Aubrey G. Lanston
, said these price increases are worrisome because they could eventually result in price inflation for finished goods. "The timing, and how much it leads to a rise in finished goods, is subject to interpretation," said Quan. "The lag may be longer than it used to be, but a peak in intermediate and core prices usually suggests inflation on finished goods will pop up somewhere down the line."
Sullivan was less concerned with these increases, calling the bond market's fears of price inflation "misplaced at this time." He noted that some components of the intermediate index -- such as those related to housing construction -- don't have a counterpart in the finished goods index (the PPI doesn't factor the price of a house). In addition, he said the competition for products is greater at the finished stage, making it harder to pass on price increases. Temporary shortages and other factors make the crude and intermediate components volatile (plywood prices rose 9.7% in June), he added.
The retail sales report was also a mixed grab bag. Sales rose just 0.1% in June, including a 1% decline in auto sales, but sales for May were revised upward to 1.2% from 1%. Excluding autos, sales were up 0.4% in June, in line with consensus estimates as reported by
. But economists say evidence of declining demand is trickling in -- sales of furniture and building materials has tailed off in the last few months. And while the evidence is anecdotal, Sullivan added that
is cutting back on the manufacture of sport utility vehicles this month in response to declining demand.
But "there's a great deal of skepticism as to whether consumers are ready to close their pocketbooks just yet," said Sullivan, explaining the veritable shoulder-shrug the bond market gave to this release.
Moody's Investors Service
senior economist, said worries about what is yet to be explains the market's muted reaction as perpetual looking ahead. "Since those
PPI results were compiled we've had steep upturns by crude oil and a host of industrial metals," said Lonski.
The market generally places more importance on the CPI than the PPI because it's a broader measure of prices, including the prices of services and goods. The forecast for tomorrow's release is for a 0.1% increase in the overall CPI, and 0.2% in the core CPI.
Philadelphia Fed Index
for July is also released tomorrow. This timely indicator of regional manufacturing sentiment fell to 5.3 in June after hitting 21.1 in May and 26.2 in April.