Retail Sales and Consumer Prices In-Line, Bond Yields Drift Lower

Includes: IEF, IEI, SHY, TIP, TLH, TLT
by: Bondsquawk, CFA

By Rom Badilla

Retail Sales came in close to expectations suggesting subdued consumer activity and slowing economic growth. The U.S. Department of Commerce released its Advanced Retail Sales data which increased by 0.4 percent in July after a revised prior period decline of 0.3 percent. Despite the July improvement, the latest release failed to meet market expectations as surveys called for an increase of 0.5 percent. Similarly, Retail Sales less Autos increased 0.2 percent versus surveys of 0.3 percent. Retail Sales, stripping out auto and gas components declined 0.1 percent versus expectations of an increase of 0.1 percent and after a revised prior period reading of a gain of 0.2 percent.

After falling for three consecutive months, consumer prices in the U.S. increased in July, mostly in-line with expectations. The U.S. Bureau of Labor Statistics released its Consumer Price Index which increased by 0.3 percent on a month over month basis in July. The increase was slightly above market surveys as economists expected general price levels to increase by 0.2 percent after falling since April. Consumer Prices excluding Food and Energy aka “Core CPI” increased by only 0.1 percent in which met economists’ surveys after increasing by 0.2 percent in the prior month. On a year over year basis, Core CPI remained at a subdued 0.9 percent after this latest release which should temper inflation expectations and bond yields.

Beyond the headlines, the components are roughly in-line with stabilization in price pressures. Owners Equivalent Rent (OER) increased for the second consecutive month after falling earlier in the year. OER which represents roughly 25 percent of total CPI increased by 0.1 percent but fell on a non-seasonally adjusted basis by 0.2 percent. Tobacco increased substantially by 1.6 percent, which were offset by price declines of 0.1 percent in both the recreation and medical care components.

Finally on the economic data front, the University of Michigan revealed its latest survey which suggests that confidence for consumers remains at relatively low levels. Preliminary Consumer Confidence for August came in at a reading of 69.6, which were above surveys by six tenths of a percent but were mostly in-line with expectations. The survey increased from a July reading of 67.8 but despite this, Confidence remains low after plunging from a averaging in the low to mid 70’s throughout 2010. Comparatively, the survey reached a five-year apex of 96.9 at the beginning of 2007 and before the onset of the current economic recession.

As far as market reaction is concerned, bond yields on the long-end are lower after today’s economic data releases. Both the 10-Year and Long Bond are down 5-6 basis points to 2.70 and 3.89 percent, respectively. Inflation expectations as evident by the yield differential between the 10-Year and 10-Year TIPS are unchanged from yesterday but lower from earlier in the week at 1.68 percent. The 2-Year is trading at 0.53 percent, a slight decline of nearly a basis point from yesterday’s close.