Treasurys, Stocks Reverse Rally Amid Mixed Economic Data

US Treasurys retraced a portion of yesterday’s rally as yields/swap rates increased 2-5 bps across the curve, continuing yesterday’s post-Fed announcement momentum.  The yield on the 10-year note is back above 2.16% after touching as low as 2.10% following a report yesterday morning which showed inflation decelerating for a third consecutive month.  All three major US stock indices fell 0.1%-0.5% on the day, as the selloff in tech stocks resurfaced and drove the Nasdaq lower.  New economic data released today displayed mixed results, beginning with initial jobless claims declining by 8,000 last week to a seasonally adjusted 237,000 (240,00 expected).  The four-week moving average of new claims edged marginally higher to 243,000, albeit still in support of a healthy labor market which Janet Yellen believes will “strengthen somewhat further.”  A separate report today exhibited US industrial production remained unchanged during the month of May, a 1.1% decline from April’s revised level.  More concerning was the manufacturing component, which declined 0.4% MoM (+0.2% expected), weighed down by a 2% drop in motor vehicle production and 0.8% fall in overall production of durable goods.  Other data releases on the day included the Empire State Manufacturing Survey, which showed a higher than expected rise to 19.8 for June after a -1.0 May reading, and import (-0.3%) and export (-0.7%) price indexes, both of which displayed larger than anticipated drop-offs.

Across the pond, policy makers at the Bank of England announced the decision to hold its benchmark borrowing rate steady at 0.25%, in-line with expectations.  However, concerns over rising consumer prices resulting from the recent decline in the pound led three of the eight-member Monetary Policy Committee to vote in favor of a rate hike.  The summary released after the decision detailed the potential for inflation to exceed 3% by the Fall and “likely to remain above the target for an extended period as sterling’s depreciation continues to feed through into the prices of consumer goods and services.”  Supporting the decision to leave rates unchanged has been the recent political instability in the area, along with the slowdown in wage growth and retail sales reported this week.  Looking ahead, swap pricing now indicates a near 50% chance of a BOE rate hike by the end of 2018, up almost 20% from yesterday’s probabilities.  The British pound slid 0.1% during today’s session to $1.274.