Yields rise as data renews economic confidence By Reuters

(In August 15 story, correct typo in company name in paragraph 10 to “+” from “&”)

By Alden Bentley

NEW YORK (Reuters) – U.S. Treasury yields rose on Thursday after solid economic data all but erased fears of a hard economic 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.

The data restored confidence, which had been shaken by a surprisingly weak employment report a few weeks ago, and reinforced the picture of improving July inflation in the producer price index and consumer price index.

“That will remove 50 basis points in September. (I) still think 25 basis points makes sense, just because inflation continues to come down and we’ve had some good reports, PPI and CPI adding to that,” he 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.”

Thursday’s rise in the yield on the two-year note appeared to be the biggest daily gain in about four months. The 10-year yield initially tracked its biggest basis point gain in several weeks before paring slightly.

“While that’s pretty big for a one-day move, in the context of the lower move in yields in the most recent period here, it’s really just a small return and to us it makes sense,” said Scott Pike, senior manager of portfolio at Income Research + Management in Boston.

Further news that US industrial production fell 0.6% in July, more than the 0.3% decline expected, barely affected the yield trajectory as manufacturing makes up a smaller share of the economy than the 70% it constitutes by consumer.

Sentiment split since the Aug. 2 jump in the July jobless rate to 4.3 percent between traders betting on a 50-basis-point cut at the Sept. 17-18 Federal Open Market Committee meeting and a more cautious cut of 25 bps has settled for now, favoring the latter.

Federal funds futures indicate traders see the odds of a 25bps cut in the policy rate to 5.25%-5.5% at around 76%, 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.”

The yield on the benchmark US 10-year note rose 10.6 basis points to 3.928%, ending with the biggest absolute gain in a week.

The yield, which typically moves in step with interest rate expectations, hit its highest level since Aug. 2 and was last up 15.9 basis points at 4.1055%, which would be the highest since up 22.2 bp since April 10.

The yield on the 30-year note rose 7.7 basis points late Wednesday to 4.1856 percent.

The closely watched spread between yields on the two and , seen as an indicator of growth expectations, was at negative 18 bps, deepening a reversal from late Wednesday’s reading of 12.8 bps.

An inverted yield curve is generally seen as indicating a recession. Last week, hopes of an aggressive 50 bps Fed easing in September to counter a slowdown briefly swung the spread between 2-year and 10-year yields to a positive 1.5 bps, the first time the curve has a more normal upward slope from July 2022.