A minor surprise

By Dwight Johnston on January 12, 2018 at 9:25 am

Bond traders hypersensitive

The day’s two important economic releases are out. One was as expected, and one was a surprise.    

First, the expected. Retail Sales rose by .4%, and sales ex-autos and gasoline were also up .4%. These were as expected. There was a big upward revision to November ex-autos and gasoline sales, but traders don’t give revisions much attention.

The surprise was in the Core CPI rate. Economists were looking for a gain of .2% and bond traders were hoping for .1%, but core rate rose .3%. This nudged the year-over-year core rate up .1% to 1.8%. This miss was small, but bond traders are hypersensitive to any inflation news that doesn’t go their way.

The numbers had little impact on stocks, but bonds are being hit. Ahead of the releases, Dow futures were up about 100 points and now up 55. This might be more of a reaction to some disappointing earnings numbers than the economic data.

Bond prices were unchanged ahead of the number, with the 10-year at 2.54%. The 10-year yield has jumped to 2.58% on the knee-jerk reaction to CPI. Some bond traders might view this as a buying opportunity. The 2-year yield has just moved over 2%. This has no real significance, but it’s been a very long time since we’ve seen a 2% 2-year note.  

Housing Starts and Industrial Production are the key economic releases next week. Neither should get much attention from traders. Stock traders will be focused on earnings releases as the “season” kicks into high gear. I’m not sure what bond traders might focus on, but it could be negotiations in D.C. on the spending bill. The current bill expires next Friday, and a failure to pass the bill would lead to a partial shutdown. This is something Congress wants to avoid, but Trump’s demands on immigration and the “wall” are threatening a deal. 

Stocks are two for two in January, as the indexes look set to record another positive week. Bonds also look set to go two for two, but in reverse. 

Opening Market Rates

  • 2-year is 2.02%
  • 5-year 2.38%
  • 10-year is down 15/32s at 2.59%
  • 30-year bond is down 20/32s at 2.90%.




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