A benign report on consumer inflation is spreading good cheer in the Treasury market this morning, dropping the benchmark 30-year issue's yield to within striking distance of 6%.
The bet, evidently, is that the economy is slowing, therefore lower interest rates won't cause it to overheat. The risk is that it's too soon to take interest rates lower, and that the lower rates will ultimately force the
to do more rate-hiking than it would otherwise have to. Tony Crescenzi, chief bond market strategist at
Miller Tabak Hirsch
, puts it this way: "We're not going to get much of a slowing, especially if rates fall and stocks rise."
The long bond was lately up 26/32 at 101 11/32, trimming its yield 6 basis points to 6.03%, a level it hasn't closed below since July 28. With the Fed widely expected to hike its target for the fed funds rate, the key short-term interest rate, to 5.25% from 5% at its next meeting on Tuesday, shorter-maturity note yields were participating in the rally to a smaller degree. The two-year Treasury note, for example, shed just 3 basis points to 5.69%.
Consumer Price Index
, the government's broadest inflation measure, advanced 0.3% overall and 0.2% at its core, which excludes volatile food and energy price. The results were in line with the average forecast of economists surveyed by
, and they relieved fear of a stronger-than-expected report, which might have done considerable damage to the market.
The other major economic indicators released this morning --
industrial production and capacity utilization
, both for July -- point up the crosscurrents at work in the economy.
Housing starts bounded 5.7% to a 1.661 million pace, but remain well below their January peak of 1.820 million, due to the rise in long-term interest rates that has occurred since then.
But the industrial production report added to the emerging picture of a manufacturing sector on the rebound. The 0.7% increase in industrial production was a tenth less than expected, and weather-related utility output contributed heavily to it. Still, the manufacturing output advanced 0.6%, its biggest increase since October. And the capacity utilization rate rose to 80.7%, its highest level since December.
Housing may be stabilizing, but manufacturing is rebounding, and the impact on the economic growth rate remains to be seen.