Inflation Flat in June As Slowdown Continues

Andrew Cummings
July 15, 2017

US treasury yields dropped Friday after USA inflation rates slowed again and retail sales weakened unexpectedly, adding to doubts that the Federal Reserve will raise interest rates again this year.

Traders will also be looking at the U.S. consumer price index (CPI) data as the next important inflection point with year-on-year inflation rate estimated to decline for a fourth consecutive month by 1.7 percent in June following a similar gain in May, it would also be the lowest since November 2016. The core CPI, which excludes food and energy prices, fell to 1.7 percent from 2.2 percent over the same period and is forecast to hold steady.

The Treasury market rallied on Wednesday after Fed Chair Janet Yellen, in congressional testimony, appeared to express deeper concerns over how persistent weak inflation may prove.

The continued drop in sales surprised economists, who had expected sales to inch up by 0.1% compared to the 0.3% decrease originally reported for the previous month.

"The reaction in the bond market, it's more of a function of retail sales".

Additionally, the Commerce Department is scheduled to release its report on business inventories in the month of May. Ex-auto sales were expected to rise by 0.2%.

That was supported by a third report showing a measure of consumer sentiment fell to a reading of 93.1 in early July from 95.1 in June. "Future removals of accommodation should be done in a gradual and patient manner".

The New Zealand dollar was trading at 73.16 U.S. cents as at 5 pm from 72.84 cents late yesterday but was weaker versus last Friday in NY when it traded at 73.80. Year-on-year, production advanced 6.5%. The core CPI increased 1.7% year-on-year - still short of the Fed's 2% target. The British pound gained significantly relative to the greenback, moving up by 1.11% to climb above the $1.30 level.

Data from Eurostat showed that the Eurozone trade surplus increased in May as growth in exports outpaced the rise in imports. The 2 yr yield was at 1.35% before the data and is down 2 bps since.

Meanwhile, Chicago Fed President Charles Evans, also a voting member of the rate-setting Federal Open Market Committee, will post his speech originally intended for Thursday at 1 p.m. Spot gold traded almost $13 per ounce higher (+1%) to $1,231/oz, its highest since before the 4th of July holiday.

However, manufacturing output was up just 0.2 per cent and is up 1.2 per cent year-over-year, with capacity well below its peak.

South Africa's rand hit a two-week high against the greenback.

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