U.S. wholesale inflation falls 0.1% in July
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Treasury yields lost further ground on Wednesday, as a weak reading for wholesale inflation clouded the third-quarter economic outlook and the picture for one more rate increase this year, which can be bearish on bonds.
The benchmark 10-year Treasury's yield fell 3.4 basis points to 2.216%, contributing to the previous session's decline of 3.6 basis points. Bond prices move in the opposite direction of yields.
The yield for the 2-year note edged lower 1.6 basis point to 1.323%, versus 1.339% on Wednesday, while the yield for the 30-year bond, also known as the long bond, dipped 2.6 basis points to 2.798%, compared with 2.825% on the prior day.
In early trading, traders eyed a rush of economic reports. The producer-price index fell 0.1% in July, its first drop in 11 months, missing consensus expectations of a 0.2% gain from economists surveyed by MarketWatch. Jobless claims for the week ending Aug. 5 rose 3,000 to 244,000 (http://www.marketwatch.com/story/us-jobless-claims-rise-by-3000-to-244000-2017-08-10), but the 4-week average, a more stable gauge, slipped 1,000 to 241,000.
See: U.S. wholesale inflation fall 0.1% in July, first decline in almost a year (http://www.marketwatch.com/story/us-wholesale-inflation-fall-01-in-july-first-decline-in-almost-a-year-2017-08-10)
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The worrisome dip in wholesale inflation comes ahead of Friday's key consumer-price data, the main highlight of the week. Market participants are paying newfound attention to inflation figures as more members from the policy-setting Federal Open Market Committee have said that the inflation outlook is giving it pause as the central bank considers raising rates one more time in 2017 (http://www.marketwatch.com/story/feds-evans-backs-balance-sheet-reduction-but-ambivalent-toward-another-rate-hike-2017-08-09). Previously, Fed Chairwoman Janet Yellen had said the deteriorating data were "transitory." (http://www.marketwatch.com/story/fed-holds-interest-rates-steady-dismisses-first-quarter-slump-as-transitory-2017-05-03)
Other members from the committee including Chicago Fed President Charles Evans, voting member, have been wary of talking up the likelihood of a rate increase in December (http://www.marketwatch.com/story/feds-evans-backs-balance-sheet-reduction-but-ambivalent-toward-another-rate-hike-2017-08-09). New York Fed President William Dudley provided fodder for the monetary doves in the central bank, saying inflation would have trouble hitting the 2% annual target for 6 to 10 months due to one-off factors. But he followed up his remarks saying that labor market tightness and a weaker dollar could end up supporting higher inflation.
Investors say the pace of monetary tightening is too aggressive amid slowing economic conditions. A policy misstep could hurt the U.S.'s tentative expansion.
"The risk here is that the Fed will raise rates too much, too fast. But it seems to be on a pretty slow path, a pretty dovish path," said Putri Pascualy, a portfolio manager at Paamco.
Traders on the Fed-futures market are betting on a 44% chance of a rate increase in December's policy meeting, holding the same level as Wednesday, according to the Chicago Mercantile Exchange's FedWatch tool (http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html/).
Investors are pivoting their attention back toward the state of the economy, providing a reprieve for those watching the heightening geopolitical hostilities between the U.S. and North Korea (http://www.marketwatch.com/story/government-bonds-draw-bids-as-us-north-korea-tensions-mount-2017-08-09). Tensions on the Korean Peninsula have spilled over into financial markets, drawing a flow of buyers into government paper, pushing yields lower, as investors sought out assets perceived as safe.
Traders will also await an auction for $15 billion worth of 30-year Treasurys at 1 a.m. Eastern. Trading for government paper can be influenced by debt offerings.
Elsewhere, the German 10-year government bond, or the bund, slipped more than 1 basis point to 0.414%. Equivalent French 10-year bonds followed suit, also dipping to 0.710%.
(END) Dow Jones Newswires
August 10, 2017 12:49 ET (16:49 GMT)