Retail Sales Revisions Stick it to the Treasury Market

Looking ahead to a key Greenspan speech next week, bond traders reacquaint themselves with caution.
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Treasury prices fell sharply, with the shortest-maturity issues losing the most ground, after the release of economic data that was friendly on the surface but prickly beneath it. There was also a strong technical aspect to today's trade, market analysts said.

The underperformance of the shortest-maturity Treasuries continued the trend of the last week. It reflects uncertainty about whether the

Fed is through hiking interest rates.

The benchmark 10-year Treasury note finished down 22/32 at 102 28/32, lifting its yield 9.7 basis points to 6.101%. The 30-year bond lost 31/32 to 105 2/32, raising its yield 6.9 basis points to 5.887%.

But the two-year note fell 8/32 to 99 28/32, hiking its yield 14.1 basis points to 6.433%. And the five-year note sank 16/32 to 102 1/32, swelling its yield 12 basis points to 6.251%.

At the

Chicago Board of Trade

, the September

Treasury futures contract shed 29/32 to 97 17/32.

On the surface, today's economic news gave the bond market exactly what it wanted: Slower-than-expected growth in consumer spending and lower-than-expected inflation.

June

retail sales

(

definition |

chart |

source

) rose 0.5%, slightly more than expected. But core retail sales, which excludes automobiles and is more indicative of the underlying trend, rose just 0.2%, half as much as expected.

Meanwhile, the June

Producer Price Index

(

definition |

chart |

source

) rose 0.6% overall, also slightly more than expected. But, here too, the underlying trend was positive, as the core PPI fell 0.1%. Economists polled by

Reuters

had forecast it would rise by that amount.

Treasury prices rose a little on that news, which was announced at 8:30 a.m. EDT. But 15 minutes later, they were in freefall.

The problem was chiefly that the May retail sales numbers, which triggered a rally in short-maturity Treasuries when they were released on

June 13, were revised sharply higher. May retail sales were originally reported to have fallen 0.3%. That was revised to a 0.3% gain. Excluding autos they were originally reported to have held steady. That was revised to an 0.5% gain. Those numbers cast doubt on the notion that economic growth is slowing enough to keep the Fed from raising interest rates again.

"The market rallied on the weak core PPI and retail sales

numbers, then saw the revision in May and sold off," said Mark Mahoney, Treasury market strategist at

UBS Warburg

.

The fact that Fed Chairman

Alan Greenspan is slated to deliver his semiannual address to Congress on the economy and monetary policy provided additional reason for caution to a market that hasn't had much use for it lately, said Joe LaVorgna, senior U.S. economist at

Deutsche Bank Securities

. "The economic news has been mixed but the market didn't seem to react till today," he said. "Now you're getting fear of

Humphrey-Hawkins."

To keep going higher, LaVorgna added, it "needed fresh evidence of weakness, and we're not getting that." So the runup in prices is getting undone.

Technical factors also played into the selloff, especially in the 30-year bond and bond futures contract, said John Canavan, Treasury market analyst at

Stone & McCarthy Research Associates

in Princeton. Those instruments broke through significant resistance levels yesterday, but when no major interest emerged in buying pushing them even higher, they collapsed back through those levels. "From a technical perspective, you'd think that a break above those levels would find significant followthrough," he said. "When it didn't appear, people threw in the towel."

And then there was yield-curve trading. From the first week of June to the first week of July, the 30-year bond's yield rose relative to the two-year note's. At the beginning of that period, the 30-year's yield was about 64 basis points lower than the two-year notes. A month later, it was just 40 basis points lower.

Over the last week, traders have been taking it back in the other direction by selling the short-maturity issue and buying the long-maturity one. That continued today, as the 30-year yield sank to 55 basis points lower than the two-year yield from 47.

Economic Indicators

In other economic news,

industrial production

(

definition |

chart |

source

) rose 0.2% in June, vs. an average forecast it would rise 0.3%, while the capacity utilization rate fell to 82.1% from a revised 82.2% in May.

Also, the

Consumer Sentiment Index

(

definition |

chart) rose to a preliminary 108.0 in July from 106.4 in August.

Currency and Commodities

The dollar fell against the yen and the euro. It lately was worth 107.80 yen, down from 108.12. The euro was worth $0.9381, up from $0.9370. For more on currencies, see

TSC's

Currencies column.

Crude oil for August delivery at the

New York Mercantile Exchange

fell to $31.30 a barrel from $31.47.

The

Bridge Commodity Research Bureau Index

was unchanged at 222.60.

Gold for August delivery at the

Comex

rose to $282.00 an ounce from $280.90.