The Treasury market breathed a collective sigh of relief yesterday as a modest increase in October consumer prices calmed the inflation fears aroused by Wednesday's outsized gain in producer prices.

The bond market also got more evidence of economic weakness yesterday as October retail sales showed a small decline and the weekly jobless claims rose more than expected, but traders said the price data were the main focus.

Prices rose as soon as the indicators were released, retracting a large part of Wednesday's loss, although the long end drifted off its highs later in the day.

The 30-year bond close 1/2 point higher to yield 7.81%, after having been up as much 5/8 earlier in the session.

Last month's consumer price index rose 0.1%, as did the core rate of inflation, excluding food and energy costs. Analysts had forecast a 0.2% increase in the index and a 0.3% gain in the core rate.

The consumer price numbers looked heavenly compared to the 0.7% gain in October producer prices and the 0.5% increase in the core rate of producer prices. And the 0.1% core rate was especially welcome since the core rate of consumer

Treasury Market Yields

Prev.

Wednesday Week Month

3-Month Bill 4.74 4.74 5.20

6-Month Bill 4.86 4.86 5.32

1-Year Bill 4.93 4.92 5.40

2-Year Note 5.58 5.59 5.95

3-Year Note 5.91 5.95 6.22

4-Year Note 6.02 6.03 6.34

5-Year Note 6.60 6.62 6.92

7-Year Note 6.98 7.06 7.26

10-Year Note 7.33 7.40 7.56

15-Year Bond 7.63 7.73 7.86

30-Year Bond 7.81 7.91 8.02

Source: Cantor, Fitzgerald/Tolerate

prices had posted 0.4% gains the previous four months.

Stephen Roach, a senior economist at Morgan Stanley & Co., said the tiny rise in October consumer prices "exaggerates the extent of improvement last month just as yesterday's PPI exaggerated the deterioration."

He said the 0.1% gain in the core rate offset the earlier 0.4% gains.

Mr. Roach estimated the core rate of consumer prices is really around 0.3% and said "the trend is toward a steady reduction in inflationary pressures over this year and next year."

Meanwhile, October retail sales decreased by 0.1% and sales excluding autos were flat, in line with market expectations.

Carol Stone, a senior economist at Nomura Securities, said the weakness was widespread. "Only restaurants and drugstores showed any strength." And she pointed out that sales excluding autos in September and August were revised lower.

Mr. Roach said the October sales report showed "the consumer has stalled out here in face of inadequate income growth" and was consistent with the weak consumer confidence numbers for the month.

"The consumer is really pulling back and that's the major soft spot for the U.S. economy going into the fourt quarter," he said.

Mr. Roach said there was a "high probability" that the Fed will loosen credit again before the end of the year.

Now that the CPI report has reassured Fed policymakers that inflation is not growing out of control, they will "respond to any further weakness in the economy quickly," he said.

In another sign of weakness, new claims for unemployment insurance rose 33,000 to 454,000; economists had expected little or no increase in the number.

The long end came off its highs during the course of the morning, rebounded toward the close of futures, then drifted a little lower after the money supply figures were announced.

The New York Fed said the M2 money supply rose $2.1 billion, to $3.4 trillion, in the week ended Nov. 4. Economists had expected M2 to be flat or slightly lower.

The Fed also reported that the nation's M1 money supply increased $200 million to $884 billion in the week ended Nov. 4; while M3 fell $3.7 billion, to $4.1 trillion, in the same period.

Traders said the short end did better during the afternoon when the Fed bought short-term notes for a customer. Such Fed purchases are transacted through only a few dealers and are not publicly announced.

Yesterday's auction of $12.25 billion of year bills was a success. The bills came at an average rate of 4.72%, the lowest since late 1976, and there were a stunning $50.8 billion of bids for the issue.

Traders said the market's response to yesterday's numbers was subdued, showing the big sell-off after Wednesday's producer price number may have shaken some investors out of the market for the time being.

Even though today's indicators are expected to be friendly, it probably will not be enough to push the market above current price levels, they said.

Economists surveyed by The Bond Buyer expect a 0.1% decline in October industrial production and a 79.6% capacity utilization rate, down 0.1-point from September.

The Philadelphia Fed survey and the University of Michigan's preliminary results from its confidence survey are wild cards, though, traders said.

The December bond future contract closed 21/32 higher at 100 24/32.

In when-issued trading, the 30-year 8% bond was 17/32 higher, at 102 1/32-102 5/32. to yield 7.81%.

The when-issued three-year 6% note was up 5/32, at 100 5/32-100 7/32, to yield 5.91%.

Rates on Treasury bills were mixed, with the three-month bill down to basis points at 4.63%, the six-month bill unchanged at 4.69%, and the year bill off five basis points at 4.70%.

Also, for the week ending Wednesday, the federal funds rate averaged 4.74%, down from 5.05% the previous week, according to the New York Fed.

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