A mixture of good and bad economic news left Treasury prices slightly higher at yesterday's close, with the 30-year bond up 1/4 point to yield 7.87%.
Traders were heartened by the weaker-than-expected May retail sales report, but disconcerted by a jump in the core rate of May producer prices, excluding food and energy costs.
The Commerce Department said last month's retail sales improved only 0.2%, when the consensus forecast was for a 0.7% gain. At the same time, April's 0.9% gain in sales was revised down to 0.4%.
John Lonski, a senior economist at Moody's Investors Service, said the May retail sales figure contrasted unfavorably with the big gains in spending posted in January and February. "What we can infer from this is that consumer discretionary income is not expanding as it did earlier this year," he said.
Traders said the lackluster sales report confirmed that economic growth remains sluggish and left open the possibility the economy could slip back into recession.
The fact that consumers are still reluctant to spend is sure to worry Fed policymakers, but analysts said yesterday's rise in producer prices will prevent any immediate easing in monetary policy.
The 0.6% increase in May producer prices excluding food and energy costs was far above the 0.2% gain the market expected. overall, producer prices were up 0.4%, only slightly above expectations.
But the market saw the 0.6% gain intthe core rate as a fluke since one-time surges in tobacco and commercial aircraft prices were responsible for much of the increase. Tobacco prices were up 7.3% and the cost of commercial aircraft were up 3.0%.
Economists said the weakness revealed in the retail sales report also suggested inflation would not become a big problem.
"It's hard to see in a slow growth environment with a high unemployment rate how inflation can get up too much steam," said Paul Boltz, a vice president and financial economist at T. Rowe Price & Associates in Baltimore.
Yesterday's report on weekly jobless claims was overshadowed by the morning's other indicators. New claims for unemployment insurance were unchanged at 407,000 in the week ended May 30, and Mr. Lonski said the fact that claims were steady in a holiday-shortened week "tells me you're really not getting all that great an improvement in labor market conditions."
Most of the day's price action occurred immediately after the indicators came out as retail investors bought short-term and intermediate securities.
"We saw pretty good buying today out through seven years," the head of a government trading desk said.
In the wake of yesterday's inflation report, the market will be watching today's May consumer price statistics closely.
A government bond trader said the long end had lagged the rest of the market this week because participants were wary of the inflation numbers.
If today's report on May consumer prices is decent, the whole market could do better, the bond trader said. A survey by The Bond Buyer found on average economists expect a 0.3% gain in May consumer prices.
"The market would benefit from a CPI tomorrow that basically reinforced the idea that inflation was still very moderate," the head of a trading desk said.
But he questioned how much better the long end could do, arguing that owners of 30-year paper had switched from worrying about inflation to being concerned about the political outlook, with Ross Perot presenting a challenge to the two major-party candidates at the same time an unprecedented number of congressional seats are up for grabs.
"It's hard to use an inflation yardstick with the political scenario that's developing now," the desk head said. "If you change the leadership in Washington, how do you extrapolate inflation expectations?"
"Just the uncertainty is going to keep people out of the long end," he added.
The September bond futures contract closed 7/32 higher at 101 9/32.
In the cash market, the 30-year 8% bond was 7/32 higher, at 101 9/32-101 13/32, to yield 7.87%.
The 7 1/2% 10-year note rose 7/32, to 101 6/32-101 10/32, to yield 7.31%.
The three-year 5 7/8% note was up 5/32, at 100 22/32-100 24/32, to yield 5.59%.
Rates on Treasury bills were lower, with the three-month bill down four basis points at 3.65%, the six-month bill off five basis points at 3.77%, and the year bill four basis points lower at 3.97%.
In other news, a spokesman for the Federal Reserve Bank of New York said at the bank's weekly press briefing that the nation's M1 money supply rose $7.5 billion to $958.6 billion in the week ended June 1; the broader M2 aggregate gained $7.0 billion, to $3.5 trillion; and M3 decreased $10.6 billion, to $4.2 trillion, in the same period.
Also, for the week ending Wednesday, the federal funds rate averaged 3.69%, down from 3.85% the previous week, according to the New York Fed.