By Alden Bentley
NEW YORK (Reuters) – U.S. Treasury yields jumped on Thursday after strong economic data all but eliminated fears about a hard landing and scaled back expectations that an aggressive Federal Reserve easing was coming next month.
The Commerce Department said retail sales rose 1.0% last month after a downwardly revised 0.2% drop in June. Economists polled by Reuters had forecast retail sales advancing 0.3% after they were initially reported as unchanged in the previous month.
Also out was news that 227,000 Americans filed for unemployment benefits last week, fewer than the 235,000 expected and the upwardly revised 233,000 claims the prior week.
“This will take 50 basis points in September off the table. Still think that 25 basis points make sense, just because inflation continues to ease and we got a couple of good reports, PPI and CPI adding to that,” said Steve Wyett, chief investment strategist at Bok Financial (NASDAQ:) in Tulsa, Oklahoma.
“We have the all-important employment data before the next Fed meeting, but this should reduce the feelings that the economy is imminently going into a recession.”
The rise in the benchmark 10-year note yield after the reports would be the largest in more than six weeks if it holds, while the two-year yield was on track for its biggest daily jump in almost 10 weeks.
News later in the morning that July U.S. industrial production fell 0.6%, more than the 0.3% fall expected, did not alter the morning’s trajectories, since manufacturing is a smaller part of the economy than the 70% made up by the consumer.
A sentiment tussle since Aug. 2’s market-rattling jump 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 has resolved, favoring the latter for now.
Fed funds futures indicate traders see the odds of a 25 bp cut in the 5.25%-5.5% policy rate at about 75%, up from 65% late Wednesday according to LSEG calculations.
Meanwhile 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 previous skepticism about lowering 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 off of its lows,” Bostic said in an interview with the Financial Times.
“But it does have me thinking about what the appropriate timing is, and so I’m open to something happening in terms of us moving before the fourth quarter.”
“It now appears the balance of risks on inflation and unemployment has shifted… the time may be nearing when an adjustment to moderately restrictive policy may be appropriate,” St. Louis Fed President Alberto Musalem said during an event in Louisville, Kentucky.
The yield on the benchmark U.S. 10-year note rose 12.3 basis points to 3.946%, on track for the biggest absolute gain since July 1.
The yield, which typically moves in step with interest rate expectations, rose 15 basis points to 4.095%, which if it holds would be the biggest since June 7’s 15 bp rise.
The 30-year bond yield rose 10.9 basis points from late Wednesday to 4.2177%.
The closely watched gap between yields on two- and , considered a gauge of growth expectations, was at negative 15.3 bps, slightly more inverted than its reading of -12.8 bps late Wednesday. An inverted yield curve is generally seen as pointing to a recession.
Hopes of an aggressive 50 bps easing in September briefly shifted the gap between 2- and 10-year yields to a positive 1.5 bps last week, the first time the curve showed a more normal upward slope since July 2022.
