Prior Week Summary
The curve-flattening trend continued in earnest last week, as strength in the long end of the Treasury curve drove the spread between the 2 and 10-yr note yields to the lowest level in nearly 9 years. The spread now stands at 94 basis points, 10 basis points lower than this time last week as market participants brace for the possibility that low yields will persist for longer than had previously been anticipated.
Despite the relative pessimism which seems to be priced into the yield curve, there have been positive signs that the economy continues to heal. Along those lines, the Commerce Department reported last week that retail sales rose by the most in a year, led by strength in online shopping. Purchases rose by 1.3% in April in a month-over-month basis, gaining 0.6% excluding autos and gas. While overall prices rise by 1.3%, the category that includes web retailers grew nearly 2.4%, which continues to increase as a percentage of total retail activity.
A separate report detailed that producer prices rose by a seasonally adjusted 0.2% in April, according to the latest figures released by the Labor Department. Excluding the more volatile components of food and energy, producer prices rose marginally by 0.1% in April. The marginal gain in prices followed two months of declines as a weaker dollar and a rebound in oil prices help to firm up inflation expectations.
The Look Forward
This week the market is looking forward to updated data on consumer price inflation, industrial production, housing data, as well as the minutes of the April FOMC meeting. The Fed’s Williams, Lockhart, Dudley, and Harker all have speaking engagements on the state of the economy scheduled. Light auction calendar this week, with the largest note issuance is the $11b 10-yr TIP reopening.