Soft U.S. Data Boosts Euro, Gold

By John Lee

U.S. 10-year Treasury bonds fell today, after conflicting reports were released today. The producer price index was unchanged in March and April, which is an essentially neutral economic report, while the retail sales numbers came out much lower than expected. Analysts were looking for a 0.4% gain, but sales actually fell 0.2%. The weak numbers led traders to increase bets that the Fed would be forced to cut rates by the end of the year to handle slowing growth. However, bond traders decided to focus instead on the neutral PPI numbers, which led to a slide in bond prices. Bonds typically fall on economic strength and rise on weakness, so traders chose to focus on the positive aspects of today's reports to speculate on a rosy future U.S. economy.

The euro rallied back against the dollar and the yen today, after retail sales numbers released today missed expectations by a long shot. Yesterday, the ECB held the overnight rates but promised "vigilance," specific wording which often precedes a rate hike. The euro fell yesterday on the wording, but rebounded today to take back all of yesterday's losses. The U.S. dollar gave up gains to close up fractionally over the Canadian dollar, extending a bounce from near-yearly lows. The U.S. currency also gained against the yen, despite the weak sales numbers.

Crude oil futures rose about 0.8% yesterday, on further speculation that summer demand will lead to fuel shortages. Summer is typically a period of high energy use and demand, and for the last two days, traders have been focusing on those issues, and trading the price of oil higher as a result. Crude is still trading fairly close to 60 a barrel, which has acted as a key support level for most of the year. Natural gas futures rose 2% on similar summer demand issues.

Gold futures rose about 0.8%, as the dollar fell against the euro. Gold prices usually trade inversely to the dollar and with oil; today, gold action was dominated by dollar trading, which fell against the euro on a weak retail sales report. Traders bought gold and sold the dollar to hedge against dollar weakness. Copper futures gained just over 1% as traders wagered that the Chinese economy will continue to grow at a fast pace.

Grains jumped across the board. Soybeans rose just over 2%, wheat gained 2.6% and corn rose 4.3%.

Economic News
Retail sales fell 0.2% in April versus expectations of a 0.4% gain.
PPI minus food and energy was unchanged in April.