Treasury Yields Plunge to 2017 Low after Weak CPI and Retail Sales

Economists weren't expecting strong reports on retail sales and the Consumer Price Index Wednesday morning.

But what they got was a lot worse than they expected.

Consumer prices dipped 0.1% May when economists expected a flat reading. The core CPI, which factors out food and energy, was also lower than expected with a 0.1% gain.

Annualized numbers look worse. Jim Baird of Plante Moran Financial Advisors notes:

The 12-month measures for each extended their recent softening trend. The CPI dipped lower to 1.9%, after peaking at 2.7% briefly in February. Likewise, core inflation receded to 1.7% from a 2.3% high in January.

The retail sales report was worse. Sales fell 0.3% from last month when a flat reading was expected. Factor out auto sales, a known weakness, and sales were still down 0.3% when a gain of 0.1% was expected.

Peter Boockvar of The Lindsey Group has the longer-term perspective:

Core retail sales growth remains mediocre as measured by the 2.9% y/o/y gain which is back below the 5 year average of 3.3% and well below the 5%+ pace of gains seen in the prior two expansions.

The yield on the benchmark 10-year Treasury note quickly plunged to 2.14% from 2.20% just before the 8:30 a.m. ET releases. By 9:15 a.m. it was at 2.13%. That's an 8 point drop from Tuesday's close and the lowest level all year.

The Federal Reserve is widely expected to announce a rate hike this afternoon. It may well keep with that plan. But hiking rates more into what is now more clearly a slowing economy seems unlikely.

Ian Lyngen and Aaron Kohli of BMO Capital Markets had this to say on that topic:

We don't think that it derails the Fed this afternoon (although perhaps it should), but it makes tightening later this year much more difficult. We think this effectively takes September off the table -- it was already a challenge given the proximity to the budget/debt-ceiling.

The iShares 20+ Year Treasury Bond ETF ( TLT) was set to open 1.2% higher at $125.82 based on pre-market trading Wednesday. That would be its highest level this year.

Michael Shaoul of Marketfield Asset Management suggested investors may be overreacting and that inflation trends may not weaken more from here unless commodity prices drop. He wrote to clients:

provided we are not at the start of another steep leg down for commodity related inflation current inflation expectations are starting to look unrealistically bearish. Nevertheless we would respect the dominant trend in place right now is towards lower long term yields and lower inflation compensation and this morning's release will have given further impetus to a trade that had already been growing in popularity.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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