Treasuries Move Sharply Higher Reaction To Tamer-Than-Expected Inflation Data

(RTTNews) - With traders reacting to a highly anticipated report on consumer price inflation, treasuries moved sharply higher during trading on Thursday.

Bond prices surged early in the session and remained firmly positive throughout the day. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, slumped 8.7 basis points to 4.193 percent.

The rally by treasuries came following the release of a closely watched Labor Department report showing consumer prices in the U.S. unexpectedly edged slightly lower in the month of June.

The Labor Department said its consumer price index slipped by 0.1 percent in June after coming in unchanged in May. Economists had expected consumer prices to inch up by 0.1 percent.

The unexpected dip by consumer prices came as another steep drop by gasoline prices more than offset a continued increase in shelter costs.

Excluding food and energy prices, core consumer prices crept up by 0.1 percent in June after rising by 0.2 percent in May. Core prices were expected to increase by another 0.2 percent.

The report also said the annual rate of consumer price growth slowed to 3.0 percent in June from 3.3 percent in May. Economists had expected the pace of price growth to decelerate to 3.1 percent.

The annual rate of core consumer price growth also slowed to 3.3 percent in June from 3.4 percent in May. The pace of growth was expected to remain unchanged.

The slowdowns by annual price growth added to optimism the Federal Reserve will lower interest rates as soon as its September meeting.

"This is the kind of CPI report the Fed wants to see [to] feel more confident that inflation is headed back toward their target," said Bill Adams, Chief Economist for Comerica Bank. "The Fed targets 2% inflation by the personal consumption expenditures price index, which usually runs a little cooler than the CPI."

He added, "The CPI report won't be enough to convince the Fed to cut interest rates at their decision this month, but a rate cut at the following decision in September is quite likely."

A report on producer price inflation is likely to attract attention on Thursday along with a report on consumer sentiment, which includes readings on inflation expectations.