Retail Sales Report Sends Bonds Into Free Fall

Ignoring a moderate Consumer Price Index, traders are selling bonds hard on signs that the economy remains red-hot.
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Consumers are spending their days in checkout lines, as shown by this morning's

retail sales

report, and that's killing bonds this morning.

Retail sales rose 0.9% in November, thanks to a 2.4% increase in auto sales, and the strength in this figure has the market ignoring the generally in-line

Consumer Price Index

, the market's most closely watched consumer gauge.

Excluding auto sales, retail sales were up 0.4%, in line with expectations according to


, but the headline figure did the damage. The CPI rose 0.1%, lesser than economists' forecasts for a 0.2% increase, according to


, and the core (ex-food and energy prices) rose 0.2%, in line with expectations.

"The sales show the degree of momentum the economy has right now," said Tony Crescenzi, chief bond market strategist at

Miller Tabak

. "Most know the momentum has accelerated in December."

Treasuries, already weaker due to overnight selling in European bond markets, were plundered. The bond futures contract, traded on the

Chicago Board of Trade

, fell more than a point in early trading, spurring technically-motivated selling. Lately the 30-year Treasury bond was down 1 10/32 to 97 18/32, boosting the yield to 6.30%.

The market was looking for a 0.5% increase in retail sales, but the increase in auto sales blew that estimate out of the water. In addition, retail sales for October were revised higher, to a 0.3% increase from the original unchanged estimate. On a year-over-year rate, retail sales are rising 10.4%, compared with 5.8% in November 1998.

With the December shopping season already looking strong, fourth-quarter consumer spending could grow at a 4.5% to 5% rate, according to economists. David Resler, chief economist at

Nomura Securities

, said he is raising his forecast for fourth-quarter GDP to about 4.5% from 3.9% due to today's retail sales figures.

What worries the market is, demand will outstrip producers' ability to manufacture goods, and with unemployment running so low they'll be forced to pay up for labor, and raise prices to pay for it. Until now, productivity enhancement has kept up with demand and offset rising producer costs, but the


isn't convinced that trend will continue.

"The momentum we have in the economy, combined with loose financial conditions, should compel the Fed to move," said Crescenzi, who believes the Fed should raise the fed funds target by 50 basis points come Feb. 2. It's generally believed the Fed will stay out of the market when it meets Dec. 21 so close to the Y2K date change.

Today the market increased its estimate of the odds for a February rate hike to 85.9%. The

fed funds futures

contract listed on the

Chicago Board of Trade yesterday was pricing in a 77.3% chance of a Fed rate hike, to 5.75% from 5.5%, at its Feb. 1 meeting.

The market also wasn't thrilled with the

Atlanta Fed's

November regional manufacturing survey, which showed strength in the Southeast region of the country. The report, released at 9 a.m. EST, rose to 21.7 from 14.4 in October. This report is released after a host of other regional manufacturing surveys, as well as the

National Association of Purchasing Management's

index, so it generally carries little weight. But on days like this, any news is bad news.