U.S. wholesale inflation falls 0.1% in July
Investors snapped up Treasurys, dragging yields lower, on Wednesday as a weak reading for wholesale inflation clouded the third-quarter economic outlook and the chances for one more rate increase this year, which can be bearish on bonds.
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Bond prices also rebounded thanks to growing geopolitical concerns over North Korea as investors shifted their money out of stocks and other risky assets and placed them in the perceived safety of government paper. U.S. stock indexes, including the S&P 500 and Dow Jones Industrial Average , posted their largest single-day declines since May 17.
The benchmark 10-year Treasury's yield fell 3.4 basis points to 2.211%, 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 two-year note was flat at 1.335%, versus 1.339% on Wednesday, while the yield for the 30-year bond, also known as the long bond, dipped 3.7 basis points to 2.788%, compared with 2.825% on the prior day.
In morning trading, traders grappled with 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 four-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)
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 of the committee, including Chicago Fed president and voting member Charles Evans, 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 six 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 at 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/).
But without a more significant move toward lower inflation, the Federal Reserve would likely continue its pace of monetary tightening, said Lindsey Piegza, chief economist at Stifel Fixed Income.
Bond investors are pivoting their attention back toward the state of the economy, providing a small 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 in the past few days, drawing a flow of buyers into government paper, pushing yields lower, as investors sought out assets perceived as safe.
Long-dated Treasury yields tipped lower after midday in New York after a strong auction for 30-year Treasurys. Analysts said weakening consumer prices and geopolitical concerns helped to draw healthy bidding from foreign buyers. Trading for Treasurys can be influenced by debt offerings.
Elsewhere, the German 10-year government bond, or the bund, slipped shy of 2 basis points to 0.414%. Equivalent French 10-year bonds followed suit, also dipping to 0.710%.
(END) Dow Jones Newswires
August 10, 2017 16:31 ET (20:31 GMT)