Treasury yields climbed on Monday after a sold retail sales figure highlighted the robust U.S. economy, an environment in which the Federal Reserve may feel comfortable raising interest rates at its current pace even as a potential U.S.-China trade conflict looms.
What are Treasurys doing?
The 10-year Treasury note yield TMUBMUSD01Y, +0.33% rose 2.6 basis points to 2.856%. The 2-year note yield TMUBMUSD02Y, +0.80% added 1.8 basis points to 2.601%. The 30-year bond yield TMUBMUSD30Y, +1.02% climbed 3.2 basis point to 2.965%, the largest one-day yield jump since June 20.
Bond prices move in the opposite direction of yields.
What’s driving markets?
The U.S. economy continued to show signs of strength. Retail sales in June came in at a 0.5% increase, matching the forecast of a 0.5% increase from economists polled by MarketWatch. The boost in spending comes after data showed the rise in consumer prices hit a six-year high. Meanwhile, the Empire State manufacturing index, a gauge of the local economy’s strength in New York state, fell in July to a reading of 22.6 from an eight-month high of 25, but is nonetheless a robust figure as all readings above zero signify improving conditions.
With President Donald Trump finishing his meeting with Russian President Vladimir Putin in Finland, investors have shifted their attention back to a strong economy. Solid growth and higher inflation should weigh on bond prices in part because they could give the Fed added support for raising rates at their current pace. The central bank’s dot plot, an aggregate of senior Fed official’s forecast for the fed-funds rate, shows the current tightening cycle should end at 2.9%.
The optimistic outlook for the U.S. economy contrasts with China, after a downbeat report in the world’s second largest economy suggested it was ill-prepared for a trade conflict. China’s second-quarter GDP grew at 6.7% year-over-year, its slowest pace since 2016, from 6.8% in the first quarter.
Last week, the Trump administration said it planned to impose tariffs on a list of $200 billion Chinese imports. The simmering trade tensions have kept a lid on Treasury yields by drawing skittish investors into the perceived safety of U.S. government paper.
See: China growth slows slightly in second quarter
The headline-grabbing event for this week, however, is likely to be Federal Reserve Chairman Jerome Powell’s testimony in front of Congress as part of the semiannual policy outlook. In remarks last week, Powell cited the U.S.’s solid economic momentum, saying it should keep the central bank on track for its current rate-hike trajectory. At the same time, he said tariffs could hurt the growth picture. Powell testifies Tuesday and Wednesday.
Read: Fed’s Powell says trade disputes could turn out badly
What did market participants say?
“Yields could be on the rise because of upward revisions to the last retail sales figures. The other thing is we’re getting through some of the event risks. Trump is meeting Putin, once that goes by, investors won’t have to focus on the geopolitical issues as much and focus on the strong cyclicals underpinning the U.S. economy,” said Jim Caron, a money manager for Morgan Stanley Investment Management.
“At this point, a September [interest-rate] increase is fully priced into the market with the upside risk of a fourth-round hike come December. While stronger inflation supports the hawkish argument to move forward with an end-of-the-year increase, potentially taking the fed-funds rate to 2.50%, ample uncertainty surrounding the longer-term implications for topline growth, job creation and earnings will reaffirm the need for patience,” said Lindsey Piegza, chief economist for Stifel, in a Monday note.