Treasurys Surge Following Weak Inflation, Retail Sales Data

Economic data on the day began with the Labor Department’s consumer price report, which displayed evidence of stabilizing inflationary pressures.  During the month of April, the cost of living in the US rose 0.2% (matching forecasts) as an increase in energy prices (+1.1%) helped to offset a decrease in motor vehicle costs (-0.7%).  Core CPI inflation disappointed again last month with a skimpy 0.1% advance (+0.2% expected), marking the second lowest core figure since April 2013.  YoY headline inflation climbed 2.2% while core inflation increased 1.9% from the previous year.  In a separate report from the Commerce Department, retail sales in April advanced 0.4%, slightly below expectations of +0.6% but still representing a steady climb from March’s 0.1% revised gain.  Consumer purchases were robust across nine of the thirteen categories, but declined 0.5% at clothing stores, a sector where online retailers continue to gain market share.  Retail control group sales, which exclude autos, gasoline, building materials and food services, rose 0.2%, highlighted by purchases of electronics and appliances (+1.3%).  Total retail sales were up 4.5% in April compared to the previous year’s level.  Other data on the day included the preliminary reading of the University of Michigan’s survey of consumer sentiment for May, which displayed an increase to 97.7 as assessments of the current economy remained robust, while expectations of future conditions climbed to a four-month high.

A flight to safety in US financial markets opened the morning trading after the weaker-than-expected consumer price and retail sales data.  Treasurys resumed yesterday’s rally, with yields/swap rates currently down 4-7 basis points across the curve as the yield on the 10-year note fell to its lowest level of the week at 2.32%.  Gold similarly extended its rally, up 0.3% on the day after gaining 0.5% in the previous session.  US equities are mixed, with the DJIA and S&P 500 down 0.2% on the day while the Nasdaq is currently 0.1% higher.  Stocks are poised to post their first weekly loss in the past month, as a series of disappointing corporate earnings and ongoing political concerns prompted a general negative equity sentiment.

Amid the seemingly never-ending political drama that threatens to delay any planned/proposed fiscal policy initiatives, this morning the administration announced a trade deal with China, which stands to expand the market for US credit card companies, credit rating agencies, and beef exporters.  In return, the US will remove export restrictions on Chinese cooked chicken and liquefied natural gas (LNG).  Officials from the two nations vowed to take action on the agreement by mid-July, 100 days after the first meeting between the two countries’ leaders.  The deal is expected to lead to further similar trade pacts and ultimately assist in reducing the US trade deficit with China, which totaled $347 billion in 2016.