Breadth divergence is a troubling sign for the stock market

Treasury yields edge lower ahead of retail sales and other reports

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Treasury yields were drifting south on Friday as investors awaited a slew of economic data, including retail sales and inflation expectations from the University of Michigan sentiment survey.

What’s happening?
  • The yield on the 2-year Treasury 

    was three basis points lower at 3.115%, relative to Thursday’s level.

  • The yield on the 10-year Treasury 

    fell 1 basis point to 2.937% from 2.957% late Thursday.

  • The yield on the 30-year Treasury

    slipped 1 basis point to 3.091% from 3.103% on Thursday.

What’s driving markets?

A busy week of economic data concludes with June retail sales data, expected to rise 0.9% following a 0.3% decline in the prior month, along with import prices and the Empire state manufacturing index, all at 8:30 a.m. Eastern Time.

Industrial production will be released at 9:15 a.m. Eastern, followed by the University of Michigan consumer sentiment index and 5-year inflation expectations at 10 a.m. Eastern. Federal Reserve Chairman Jerome Powell has shown keen interest in the latter.

Wholesale prices on Thursday triggered fresh inflation concerns, though remarks by Fed Gov. Christopher Waller prompted traders to pull back on the idea of a 100 basis points interest rate hike in two weeks.

Markets are now pricing in a 47.5% probability that the Fed will raise its benchmark interest rate by 100 basis points to a range of 2.5% to 2.75% at its July 26-27 meeting. Investors have been grappling with concerns Fed monetary tightening could push the U.S. economy into recession, with the 2-year/10-year spread remaining below zero.

“With the size of the next rate increase hanging on the upcoming data, today’s retail sales and the inflation expectations component in the University of Michigan’s consumer survey just became infinitely more important,” Marios Hadjikyriacos, senior investment analyst at XM, told clients in a note.

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