U.S Treasuries Mixed on Strong Retail Sales, Dovish Yellen's Comment
The U.S. Treasuries traded mixed on Friday after data showed higher than expected April retail sales data. On the other hand, Fed Chair Janet Yellen’s dovish comments supported bond prices. The yield on the benchmark 10-year Treasury note which moves inversely to its price, fell 2bps to 1.731 pct and the yield on the 2-year Treasury bond rose 1bp to 0.770 pct by 1300 GMT.
The April advance retail sales jumped 1.3 pct m/m, above market expectations for a +0.8 pct m/m, from down 0.3 pct in March. Meanwhile, ex-autos retail sales increased 0.8 pct m/m, above expectations for a 0.5 pct m/m, as compared to revised 0.4 pct m/m increase in March (previous was 0.2 pct m/m). Alongside the solid increase seen in the headline reading, we continue to anticipate broader improvement in consumer activity in the coming months, likely to come hand-in-hand with improvement in employment conditions. Moreover, the April Labor Department producer prices index (PPI) rose 0.2 pct m/m, below market expectations for a +0.3 pct m/m, from down 0.1 pct m/m in March. Meanwhile, PPI ex-food and energy rose 0.1 pct m/m in April, in line with market expectations for a 0.1 pct m/m rise, from unrevised down 0.1 pct m/m reading in March, result.
In addition, the Fed Chair Janet Yellen in a letter to congress said that she expects continued US economic strength and gradual approach to interest rate increases. Said inflation will return to the Federal Reserve's 2 pct goal over time and the Fed will adjust policy if outlook changes unexpectedly. Interestingly, mentioned that she will not completely rule out the use of negative interest rates in some future very adverse scenario.
The U.S treasuries have been closely following developments in oil markets because of their impact on inflation expectations, which are well below the Federal Reserve's target. Today, the crude oil prices fell in early trading on Friday as a stronger USD weighed and Russia warned that a global crude supply overhang could last into next year. In Canada, crude production outages from oil sand fields following forced closures due to wildfires still stood around 1 million bpd as of Wednesday, although operators said they were gradually ramping up output. The International benchmark Brent futures fell 1 pct to $47.60 and West Texas Intermediate (WTI) tumbled 1.56 pct to $45.97 by 1300 GMT.
Yesterday, the US Initial jobless claims increased +20k to 294k, recoding the highest level since 28 February 2015) for the week ending 7 May, as compared to unrevised 274k reading seen in the week prior, well above expectations for a 267k result. Similarly, the 4-week average was reported at 268.3k, from the unrevised 258.0k reading seen in the week prior. The insured unemployment rate held unchanged at 1.6%. Moreover, April export prices rose 0.5 pct m/m, against market expectation of 0.1 pct m/m, from prior 0.0 pct in March. Yesterday, the wholesale inventories rose 0.1 pct m/m, this comes in below market expectations for a rise of 0.3 pct m/m versus the revised -0.6 pct m/m reading that occurred in February (previous was -0.5 pct m/m). The weaker than expected increase in inventories stemmed from downward pressure seen in durables, which declined 0.1 pct m/m, offset by upward pressure seen from non-durables, which climbed 0.5 pct m/m.
The markets will now focus on the next week’s April core CPI (1230 GMT) and Industrial Production (1315 GMT) on Tuesday, May Philadelphia Fed Manufacturing Index on Thursday (1230 GMT). Meanwhile, S&P 500 Futures fell 0.13 pts to 2,056 by 1300 GMT.