BOND REPORT: Treasury Yields Tick Lower After Lackluster Industrial-production Number

Industrial production for July increases 0.2%

Treasury yields fell, pushing bond prices higher, on Thursday after a weaker-than-expected reading for industrial production highlighted that the U.S. remains stuck in a slow-and-steady growth track, drawing modest demand for government paper.

The 10-year Treasury note's yield edged 0.8 basis point lower to 2.234%, while the 30-year bond's yield fell 0.7 basis point to 2.801%. But the yield for the 2-year Treasury note slumped the most, dipping 1.6 basis point to 1.318%. Bond prices move inversely to yields.

Yields pulled back across the board after industrial-production data for July increased by 0.2% (http://www.marketwatch.com/story/industrial-output-gets-boost-in-july-from-utilities-but-carmakers-are-a-drag-again-2017-08-17), its sixth straight month of gains, below the 0.3% consensus forecast from economists surveyed by MarketWatch.

"Overall, no big impact on third-quarter growth but it doesn't help cooling expectations for further Fed rate hikes this year. There are still four months to go but policy makers seem to be getting a little more cautious on the inflation front," noted Jennifer Lee, senior economist for BMO Capital Markets.

"The market just right now seems attentive to any piece of data that comes out, as a referendum on what is the current state of the economy," said Craig Bishop, lead strategist for U.S. fixed income at RBC Wealth Management.

Treasury yields briefly traded near an intraday low, which coincided with speculation that Gary Cohn had resigned as chief economic adviser to President Donald Trump. But a White House official rejected the rumors and said Cohn would keep his position in Trump's administration, according to Reuters. (https://www.reuters.com/article/us-usa-trump-cohn-idUSKCN1AX1UU)

See: Fed won't like soft July CPI data but has four months to get over it (http://www.marketwatch.com/story/fed-wont-like-soft-july-cpi-data-but-has-four-months-to-get-over-it-2017-08-11)

Treasury yields had initially climbed in early morning trade as the jobless-claims report showed a fall of 12,000 to a six-month low of 232,000 (http://www.marketwatch.com/story/us-jobless-claims-fall-to-six-month-low-of-232000-2017-08-17) in the week ending Aug. 12, a sign that the strongest labor market in close to two decades shows no sign of slackening. The U.S. unemployment rate currently stands at 4.3%, a 16-year low (http://www.marketwatch.com/story/us-gains-209000-jobs-in-july-unemployment-retouches-16-year-low-of-43-2017-08-04).

At the same time, the Philadelphia Fed business outlook survey's diffusion index, its broadest gauge of manufacturer's health for the Mid-Atlantic region, dipped slightly to 18.9 in August from 19.5 in July (http://www.marketwatch.com/story/philadelphia-fed-factory-gauge-eases-but-hints-at-future-strength-in-august-2017-08-17). Any number above zero represents growth in economic activity.

The choppy trading in Treasurys follows Wednesday's session when the release of the Federal Reserve's minutes aided bond-buying. The minutes revealed central-bank officials were beginning to show heightened concerns over the perplexing absence of inflation amid a strong labor market, an alignment with the market's pessimism on the odds for higher consumer prices. It also suggested the Fed could act in a more cautious manner when it decides on the appropriate pace for monetary tightening.

"Investors think any soft spot of inflation keep the fed on the sidelines," said Bishop. Consumer prices have fallen below expectations for three straight months since May (http://www.marketwatch.com/story/us-consumer-inflation-remains-soft-in-july-cpi-shows-2017-08-11).

This marked a small concession and a retreat away from the party line that had argued the recent spate of lackluster inflation readings was "transitory" and due to one-off factors. But most members of the policy-setting Federal Open Market Committee suggested the winding down of the balance sheet should begin in September.

Also read: Some Fed members say bank can be 'patient' on interest rates due to low inflation (http://www.marketwatch.com/story/some-fed-members-say-bank-can-be-patient-on-interest-rates-due-to-low-inflation-2017-08-16)

In the wake of the Fed minutes, traders looking for further commentary can look to speeches from Dallas President Robert Kaplan, voting member, at 1 p.m. Eastern and Neel Kashkari, Minneapolis Fed President, also a voting member, soon after at 1:45 p.m.

Like the U.S., European traders dealt with a raft of economic data, including inflation data that showed the annual inflation rate across the eurozone at 1.3% in July, unchanged from June. The German 10-year government bond's yield slipped 2.3 basis points to 0.422%.

(END) Dow Jones Newswires

August 17, 2017 12:42 ET (16:42 GMT)