BOND REPORT: Treasury Yields Rise After Retail Sales Help Affirm U.S. Economic Strength
July 16 2018 - 4:11PM
Dow Jones News
By Sunny Oh
Retail sales in June came in at a 0.5% increase, matching the
forecast of a 0.5% increase from economists polled by
MarketWatch
Treasury yields climbed on Monday after a sold retail sales
figure highlighted the robust U.S. economy, an environment in which
the Federal Reserve may feel comfortable raising interest rates at
its current pace even as a potential U.S.-China trade conflict
looms.
What are Treasurys doing?
The 10-year Treasury note yield rose 2.6 basis points to 2.856%.
The 2-year note yield added 1.8 basis points to 2.601%. The 30-year
bond yield climbed 3.2 basis point to 2.965%, the largest one-day
yield jump since June 20.
Bond prices move in the opposite direction of yields.
What's driving markets?
The U.S. economy continued to show signs of strength. Retail
sales in June came in at a 0.5% increase
(http://www.marketwatch.com/story/us-retail-sales-climb-again-in-june-after-mammoth-gain-in-may-2018-07-16),
matching the forecast of a 0.5% increase from economists polled by
MarketWatch. The boost in spending comes after data showed the rise
in consumer prices hit a six-year high. Meanwhile, the Empire State
manufacturing index
(http://www.marketwatch.com/story/empire-state-manufacturing-index-edges-down-in-july-2018-07-16),
a gauge of the local economy's strength in New York state, fell in
July to a reading of 22.6 from an eight-month high of 25, but is
nonetheless a robust figure as all readings above zero signify
improving conditions.
With President Donald Trump finishing his meeting with Russian
President Vladimir Putin in Finland, investors have shifted their
attention back to a strong economy. Solid growth and higher
inflation should weigh on bond prices in part because they could
give the Fed added support for raising rates at their current pace.
The central bank's dot plot, an aggregate of senior Fed official's
forecast for the fed-funds rate, shows the current tightening cycle
should end at 2.9%.
The optimistic outlook for the U.S. economy contrasts with
China, after a downbeat report in the world's second largest
economy suggested it was ill-prepared for a trade conflict. China's
second-quarter GDP grew at 6.7% year-over-year, its slowest pace
since 2016, from 6.8% in the first quarter.
Last week, the Trump administration said it planned to impose
tariffs on a list of $200 billion Chinese imports. The simmering
trade tensions have kept a lid on Treasury yields by drawing
skittish investors into the perceived safety of U.S. government
paper.
See: China growth slows slightly in second quarter
(http://www.marketwatch.com/story/china-growth-slows-slightly-in-second-quarter-2018-07-16)
The headline-grabbing event for this week, however, is likely to
be Federal Reserve Chairman Jerome Powell's testimony in front of
Congress as part of the semiannual policy outlook. In remarks last
week, Powell cited the U.S.'s solid economic momentum, saying it
should keep the central bank on track for its current rate-hike
trajectory. At the same time, he said tariffs could hurt the growth
picture. Powell testifies Tuesday and Wednesday.
Read: Fed's Powell says trade disputes could turn out badly
(http://www.marketwatch.com/story/feds-powell-says-trade-disputes-could-turn-out-badly-2018-07-12)
What did market participants say?
"Yields could be on the rise because of upward revisions to the
last retail sales figures. The other thing is we're getting through
some of the event risks. Trump is meeting Putin, once that goes by,
investors won't have to focus on the geopolitical issues as much
and focus on the strong cyclicals underpinning the U.S. economy,"
said Jim Caron, a money manager for Morgan Stanley Investment
Management.
"At this point, a September [interest-rate] increase is fully
priced into the market with the upside risk of a fourth-round hike
come December. While stronger inflation supports the hawkish
argument to move forward with an end-of-the-year increase,
potentially taking the fed-funds rate to 2.50%, ample uncertainty
surrounding the longer-term implications for topline growth, job
creation and earnings will reaffirm the need for patience," said
Lindsey Piegza, chief economist for Stifel, in a Monday note.
(END) Dow Jones Newswires
July 16, 2018 15:56 ET (19:56 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.