Inflation, Retail Sales Data Fuel Rate Cut Bets

Rates plummet following PPI, retail sales prints. Treasury yields declined following this morning’s economic data, which showed lower-than-expected prices paid to producers and a slowdown in consumer spending. Rate cut bets surged as a result, and a 25 bp move is now fully priced in for September’s policy meeting (versus October as of yesterday’s market close). Treasury yields declined 8-11 bps across most of the curve, pushing the 2-year yield (3.96%) back below 4% while the 10-year yield is now 4.43%. Meanwhile, oil prices declined significantly today after President Trump suggested that the US is closing in on a nuclear deal with Iran that could ease sanctions and result in greater global oil supply. WTI crude fell over 2.4% to $61.62 per barrel.

Producer prices show companies absorbed tariff impacts. April PPI data released today showed an unexpected decline in producer prices across monthly measurements and a slower advance on a YoY basis. Monthly headline PPI was -0.5% vs. an expected 0.2% advance, the first negative reading since October 2023, while core PPI landed at -0.4% vs. expectations of a 0.3% increase. On a yearly basis, headline and core PPI were at or below expectations, and fell ~1% from last month. Lower margins earned by service providers drove more than two-thirds of the overall PPI decline. The data signaled that producers are largely absorbing higher costs from tariffs instead of passing them on to consumers.

Retail sales plummeted in April. After retail sales reached over a 2-year high of 1.7% in March, largely fueled by increased urgency to buy ahead of new tariffs, consumer spending slowed dramatically in April. Retail sales rose by just 0.1%, with declines in purchases for clothing (-0.4%) and gasoline (-0.5%) contributing to slowed growth. Markets are optimistic that recent trade deals will prevent a prolonged slowdown, though there is still concern. Walmart noted today that they may be forced to raise prices due to tariffs, with CEO Doug McMillon stating, “We will do our best to keep our prices as low as possible but given the magnitude of the tariffs, even at the reduced levels announced this week, we aren’t able to absorb all the pressure.”