Treasuries slip after fleeting rise on tame core CPI
Fri Oct 14, 2005 11:02 AM ET
(Adds consumer sentiment, industrial production data, analyst comments, updates prices)
By Pedro Nicolaci da Costa
NEW YORK, Oct 14 (Reuters) - U.S. Treasury debt prices eased on Friday as enthusiasm over a tame reading on core inflation gave way to the realization that the data would not dissuade the Federal Reserve from raising interest rates.
Energy pushed up overall consumer prices by 1.2 percent in September after a 0.5 percent gain in August, but excluding food and energy the index climbed only 0.1 percent -- only half the increase analysts had forecast.
The surprisingly tame reading in the core figure momentarily helped stem this week's steady decline in bond prices.
But just hours after the release, bears were back at it again, pushing benchmark 10-year notes (US10YT=RR: Quote, Profile, Research) 2/32 lower. Yields inched up to 4.48 percent from 4.47 percent on Thursday.
"Nothing today at all changes our opinion of the Fed move," said Adam Brown, co-head of U.S. Treasury trading at Barclays Capital. "We expect them to raise rates at least for their next three meetings."
Indeed, the projected year-end federal funds rate traded in the futures market was near 4.23 percent, up a negligible amount from Thursday.
Two-year debt (US2YT=RR: Quote, Profile, Research) was off 1/32 and yielding 4.25 percent, up from 4.23 percent. Five-year notes (US5YT=RR: Quote, Profile, Research) were also down 1/32, and yielding 4.33 percent, while the 30-year bond (US30YT=RR: Quote, Profile, Research) tripped 5/32 lower for a yield of 4.71 percent.
Bonds barely budged after another report showed an unexpectedly large decline in September industrial production, and yet another report revealed an unforeseen dip in October consumer sentiment after an already depressed reading in September after Hurricane Katrina.
Restraining the market's advance were retail sales, which rose 1.1 percent when car sales were excluded, well above forecasts for a 0.8 percent advance and a sign that the overall economy proved resilient to the effects of Hurricane Katrina.
Overall sales rose a slightly weaker-than-forecast 0.2 percent in September after car purchases tumbled, but sales excluding autos were helped by higher gasoline prices.
The Commerce Department said it was not able to pinpoint the impact of hurricanes Katrina and Rita. But it said the effect probably went both ways, with some stores closed by the storms while others recorded stronger sales of supplies in the affected areas.
Wall Street analysts forecast retail sales to rise 0.4 percent in September following an upwardly revised 1.9 percent fall in August. August retail sales had initially been reported as a 2.1 percent decline.
September purchases were held back by a 2.8 percent drop in motor vehicle and parts sales, despite ongoing dealer incentives to boost demand.
"The economy is doing OK after the hurricane and higher energy prices are not providing any big headwinds for the economy and inflation remains very contained," said Chris Rupkey, senior financial economist at Bank-of-Tokyo Mitsubishi.
"The Fed is still going to be on guard in terms of monitoring inflationary pressures, but this has to be good news today."
Good news indeed for a bond market that after repeated warnings about a possible inflation uptick has grown even more obsessed than usual with price data.
Overall inflation was now running at an annual rate of 4.7 percent, although excluding food and energy prices they were up only 2 percent.
Meanwhile industrial output tumbled by a surprisingly sharp 1.3 percent in September due to a big drop in oil and gas output after Hurricanes Katrina and Rita, the largest decline since January 1982.
Analysts polled by Reuters were expecting production to fall 0.3 percent in September.
But most analysts viewed the decline as temporary, and that diminished its potential benefit to Treasuries.
Businesses ran at an operating rate of 78.6 percent in September, slower than forecast. Analysts were expecting capacity utilization at 79.6 percent.
U.S. consumers were just as morose as the industrial sector, with the University of Michigan consumer sentiment index slipping to 75.4 in early October from 76.9 in September. Wall Street had been looking for a rise to 80.0.
© Reuters 2005. All Rights Reserved.
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