Yields surge as data renews economic confidence
Updates as of 1433 ET
By Alden Bentley
NEW YORK, Aug 15 (Reuters) -U.S. Treasury yields surgedon Thursday after strong economic data all but eliminated fears about a hard economic landingand curtailed expectations that an aggressive Federal Reserve easing was coming next month.
The Commerce Department said retail sales rose 1.0% last month after a downwardly revised 0.2% drop in June. Economists polled by Reuters had forecast retail sales advancing 0.3% after they were initially reported as unchanged in the previous month.
Also out was news that 227,000 Americans filed for unemployment benefits last week, fewer than the 235,000 expected and the upwardly revised 233,000 claims the prior week.
The data restored confidence that was jolted by a surprisingly weak employment report a couple of weeks ago, and reinforced a picture of improving inflation from July Producer Price Index and Consumer Price Index releases this week.
"This will take 50 basis points in September off the table. (I) still think that 25 basis points make sense, just because inflation continues to ease and we got a couple of good reports, PPI and CPI adding to that," said Steve Wyett, chief investment strategist at Bok Financial in Tulsa, Oklahoma.
"We have the all-important employment data before the next Fed meeting, but this should reduce the feelings that the economy is imminently going into a recession."
Thursday'srise in the two-year note yield looked set to be thebiggest daily jump in about four months. The 10-year yield initially was tracking to its biggest basis point gain in weeks before paring slightly.
"While it's pretty large for a one-day move, in the context of the move lower in yields over the most recent period here, it's really just a little bit of a giveback, and to us makes sense," said Scott Pike, senior portfolio manager at Income Research & Management in Boston.
Subsequent newsthat July U.S. industrial production fell 0.6%, more than the 0.3% fall expected, barely affectedthe yieldtrajectories, since manufacturing is a smaller part of the economy than the 70% made up by the consumer.
Divided sentiment since the Aug. 2 jump in July's unemployment rate to 4.3% betweentraders betting on a 50 basis point cut out ofthe Sept. 17-18 Federal Open Market Committeemeeting and a more cautious 25 bps cut has resolved for now, favoringthe latter.
Fed funds futures 0#FF: indicate traders see the odds of a 25 bps cut in the 5.25%-5.5% policy rate at about 76%, up from 65% late Wednesday, according to LSEG calculations.
Meanwhile St. Louis Fed President Alberto Musalem and Atlanta Fed President Raphael Bostic on Thursday lined up behind the possibility of an interest rate cut at the U.S. central bank's policy meeting next month, reversing their previous skepticism about lowering borrowing costs too soon.
"Now that inflation is coming into range, we have to look at the other side of the mandate, and there, we've seen the unemployment rate rise considerably off of its lows," Bostic said in an interview with the Financial Times.
"But it does have me thinking about what the appropriate timing is, and so I'm open to something happening in terms of us moving before the fourth quarter."
The yield on the benchmark U.S. 10-year note US10YT=RR rose 10.6 basis points to 3.928%, wrapping up with thebiggest absolute gain in a week.
The 2-year note yield US2YT=RR, which typically moves in step with interest rate expectations, reached its highest since Aug. 2, and was last up 15.9basis points at 4.1055%, which would be the biggestsince a 22.2 bp surge on April 10.
The 30-year bond US30YT=RR yield rose 7.7 basis points from late Wednesday to 4.1856%.
The closely watched gap between yields on two- and 10-year Treasury notes US2US10=TWEB, considered a gauge of growth expectations, was at negative 18 bps, deepening an inversion fromits late Wednesday readingof negative 12.8 bps.
An inverted yield curve is generally seen as pointing to a recession. Last week, hopes of an aggressive 50 bps Fed easingin September to counter a slowdownbriefly shifted the gap between 2- and 10-year yields to a positive 1.5 bps, the first time the curve hada more normal upward slope since July 2022.
Monthly change in US retail sales https://reut.rs/3SQSYyK
Jobless claims https://reut.rs/4drmFyM
Reporting by Alden Bentley; Editing by Jan Harvey and Jonathan Oatis
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