Treasuries Surrender Gains on Friendly Economic Data

Big gains in the PPI pipeline are getting attention, but they don't appear to deserve it.
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Treasury prices are marginally lower this morning despite friendlier-than-expected readings from two key economic reports. The reports weren't friendly enough, it appears, to convince the market that the


won't raise interest rates again this year.

After trading up as much as 7/32 immediately after the 8:30 a.m. EDT release of the June

Producer Price Index


retail sales

reports, the benchmark 30-year Treasury bond lately was off 7/32 at 90 23/32, lifting its yield 2 basis points to 5.92%. Shorter-maturity note yields were anywhere from 3 to 5 basis points higher on the day.

The PPI, a measure of inflation at the wholesale level, fell 0.1% overall and 0.2% at its core, which excludes volatile food and energy prices. The average expectation among economists surveyed by


had been for 0.1% gains in both measures. The annual growth rate of the overall PPI edged up to 1.5% from 1.4%, but the annual rate for the core PPI slipped to 1.5% from 1.7%.

A 1.3% drop in new car prices was responsible for much of the weakness in prices, but lower prices were evident in other categories as well,

Daiwa Securities

chief economist Michael Moran noted in a published comment. He called the June report "unambiguously a fine reading on inflation."

Retail sales, for their part, rose just 0.1% overall and 0.4% excluding autos in June. The ex-autos result was in line with expectations, but overall,


reported an average forecast of a 0.3% gain. Lower car prices were also behind this missed estimate, as the amount of money spent on cars slipped 1.0%.

So why the selling of Treasuries? "There was really something for everyone in that number,"

Bear Stearns

Treasury market strategist Avram Altaras said, referring to the PPI. "The headline numbers were weaker, but people who wanted to sell pointed out the increases in intermediate and crude goods."

The headline PPI numbers measure the prices of


goods. But the PPI report also tracks the prices of intermediate and crude goods. And while the PPI for overall and core finished goods has been inching higher in recent months, the PPI for intermediate and crude goods has been taking leaps and bounds, and that continued in June. The intermediate PPI rose 0.4% in June, on the heels of increases of 0.2% in May, 0.6% in April and 0.4% in March. And the crude PPI rose 1.4% in June, following increases of 5.5% in May, 1.3% in April and 0.8% in March.

It's not clear, however, that traders who are selling based on the intermediate and core readings are acting on anything but intuition. "Conclusions should be guarded," Moran wrote. "These indexes are much more volatile than the finished goods measure. It is common for prices in the earlier stages of production to swing widely; many, indeed, most, or the changes never pass through to finished goods prices."


Barclays Capital

, among the most bearish interest-rate forecasters on the Street, took care to point out the counterintuitive disconnect between crude/intermediate and finished goods prices in its note on the report. "Neither the intermediate nor the crude goods indexes are good predictors of price changes at the finished goods level," senior economist Henry Willmore wrote.