Yields rise after data shows economy remains strong By Reuters

By Alden Bentley

NEW YORK (Reuters) – U.S. Treasury yields rose on Thursday after strong economic data all but removed fears of a hard landing and eased expectations of aggressive Federal Reserve easing next month.

The Commerce Department said retail sales rose 1.0 percent last month, after a downwardly revised 0.2 percent decline in June. Economists polled by Reuters had expected retail sales to rise 0.3 percent after initially being reported unchanged in the previous month.

There was also news that 227,000 Americans filed for unemployment benefits last week, down from the 235,000 expected and the upwardly revised 233,000 claims the previous week.

“That will take 50 basis points out in September. I think 25 basis points makes sense though, just because inflation continues to fall and we’ve had some good reports with PPI and CPI adding to that,” Steve said Wyett, Chief. investment strategist at Bok Financial (NASDAQ: ) in Tulsa, Oklahoma.

“We have the very important employment data ahead of the Fed’s next meeting, but that should reduce the sense that the economy is headed for a recession.”

The rise in the benchmark 10-year yield after the reports would be the biggest in more than six weeks if it holds, while the two-year yield was on track for its biggest daily jump in nearly 10 weeks.

Later in the morning news that industrial production in July fell 0.6%, more than the 0.3% decline expected, did not change the morning’s trajectory, as manufacturing makes up a smaller part of the economy than the 70% it constitutes by consumer.

A battle of sentiment on Aug. 2 has resolved the market-shattering increase in July’s unemployment rate between traders betting on a 50 basis point cut at the next FOMC meeting in September and a more cautious 25 bps cut, favoring the latter for now.

Federal funds futures indicate traders see the odds of a 25bp cut in the policy rate of 5.25%-5.5% to around 75%, up from 65% late on Wednesday, according to LSEG calculations.

Meanwhile, Fed President 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 earlier skepticism about reducing 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 from its lows,” Bostic said in an interview with the Financial Times.

“But it makes me think about the timing, so I’m open to something happening in terms of moving us before the fourth quarter.”

“It appears that the balance of risks to inflation and unemployment has shifted … the time may be approaching when an adjustment to moderately tighter policy may be appropriate,” the Fed president said in St. Louis, Alberto Musalem, during an event in Louisville, Kentucky.

The yield on the benchmark U.S. 10-year note rose 12.3 basis points to 3.946 percent, on its way to its biggest absolute gain since July 1.

The yield, which usually moves in step with interest rate expectations, rose 15 basis points to 4.095%, which, if held, would be the highest since a 15bp rise on June 7.

The yield on the 30-year note rose 10.9 basis points late Wednesday to 4.2177 percent.

The closely watched spread between yields on the two and , seen as an indicator of growth expectations, was at negative 15.3 bps, a slight reversal from its reading of -12.8 bps late Wednesday. An inverted yield curve is generally seen as indicating a recession.

Hopes of an aggressive 50bps cut in September briefly swung the spread between 2-year and 10-year yields to a positive 1.5bps last week, the first time the curve has shown a more normal upward slope since July 2022.