Daily Market Color June 14, 2017Treasurys Rally After Inflation Data While Fed Hikes, Signals Balance Sheet Unwind This morning US Treasurys prices spiked following the release of weaker-than-expected consumer price and retail sales data for the month of May. As reported by the Labor Department, the headline consumer price index declined to a seasonally adjusted 0.1% last month (no change was forecast), weighed down by sluggish growth in the housing and medical care sectors. Core inflation displayed a meager 0.1% rise MoM (+0.2% expected), marking the third consecutive month of disappointing readings, while the YoY core index level declined to a two-year low of 1.7%. Retail sales last month were similarly sub-par, reported at -0.3% MoM, the lowest reading since January 2016. YoY retail sales increased 3.8% in May, but down 0.8% from April, driven by slowdowns in purchases at electronics and appliance stores and gasoline stations. Online retailers displayed the largest growth in sales last month at +0.8%. Immediately following the data releases, the implied probability of a third interest rate hike in 2017 fell to 43%, as per fed fund futures, with the expectation for the Fed to soften their stance on future rate tightening given a weaker inflation outlook. As expected, the FOMC announced their decision for a quarter point rate increase to the benchmark borrowing rate this afternoon for the third time in the past six months, bringing the target range to 1.00%-1.25%. The vote was 8-1 in favor of the hike, and the Fed further confirmed its plan to bump rates one more time this year, but acknowledged they would be “monitoring inflation developments closely” given the unexpectedly low inflation YTD. The FOMC’s projections for inflation were updated in the statement, shifting to the stance that “inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the committee’s 2 percent objective over the medium term.” Also included in the statement was the Fed’s intention to “begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated.” The plan to unwind the Fed’s $4.5 trillion balance will initially involve the rolling off of $10 billion per month ($6 billion Treasurys, $4 billion MBS) — a pace which is expected to last five months before further adjustments. A full summary of the changes made to the Fed statement between the May and June meetings can be found here. US Treasury yields/swap rates gapped lower following the economic data released this morning, falling as much 10-12 bps at the long end of the curve before the Fed statement, after which rates headed back higher, to the current levels which were still 4-9 bps lower across the curve than yesterday’s closing values. The yield on the 10-year note declined back towards November’s low levels and closed around 2.12%. Major US stock indices traded mixed on the day, seemingly unaffected from the bond market volatility, as the DJIA touched a new record high and finished the session up 0.2%. Crude oil futures fell almost 4% on the day with continuing concerns over US inventories. West Texas Intermediate futures tumbled to below $45/barrel, the lowest level in more than a month.