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Prospects Daily: Treasuries continue to advance following decline in U.S. retail sales

Important developments today:

1. Treasuries continue to advance following decline in U.S. retail sales

2. U.S. retail sales slump for third consecutive month in June

3. Euro Area consumer price inflation held steady at 2.4 percent

Treasuries continue to advance following decline in U.S. retail sales. Treasury prices continued to move higher on Monday, pushing 5-year bond yields to record lows, as a third consecutive contraction in U.S retail sales in June raised concerns that the world’s largest economy is weakening and boosted demand for safe-haven government bonds. Investors seeking perceivably safe-haven investments, amid concerns over stalling global growth and the euro-zone debt crisis, also pushed bond yields to historic lows in the U.K., Canada, France, Germany, and the Netherland. The U.S 5-year yield fell to all-time low of 0.585% in morning trade, while the benchmark 10-year yield dropped 4 basis points (bps) to 1.45%, less than 2 bps from its lowest level of 1.439 reached on June 1.

U.S. retail sales slump for third consecutive month in June. Notwithstanding weaker energy prices in June, US consumers cut back on spending on most goods and services for the third consecutive month. Retail and food sales data released by the US Census Bureau today showed that spending was lower by 0.5% in June compared to the previous month. On a 3-month moving average basis, which smoothens monthly volatilities, retail sales fell at an annualized pace of 1.4% in the three months ending in June, sharply down from the 2.9% increase in May [see Chart at http://prospects or http://www.worldbank.org/prospects]. US household spending continues to face headwinds from the broad weakness in the US labor market (which added some 75,000 jobs per month on average in the second quarter of 2012, a sharp drop from the average monthly gain of 226,000 jobs in the first quarter), as well as continuing Eurozone uncertainty and falling consumer confidence. With consumer spending accounting for some 70 percent of US GDP, the weakening of consumption demand does not bode well for Q2 GDP.

In other high-income countries' news, Euro Area consumer price inflation held steady at 2.4 percent on a year on year basis in June, the same rate at May, according to harmonized data released by the EU statistics office Eurostat. Inflation has trended down in the first half of 2012 as cooling activity in the Euro Area and weakening of international oil commodity prices have dampened inflation pressures. However inflation still remains above the ECB’s medium term target of close to but below 2 percent.

Among Emerging Markets

In Latin America and Caribbean, in Chile, consumer prices fell into negative territory (-0.2 percent) on an annualized basis in the three months to June, reflecting decline in food and fuel inflation.

In South Asia, in India, the wholesale price index slowed down to an annual 7.3 percent in June from 7.6 percent in May. This was the slowest rise in prices since January. Annual fuel inflation was 10.3 percent in June, down from 11.5 percent a year earlier. Food prices, which rose 10.8 percent in June from a year earlier, up from 10.7 percent in May, have been mainly responsible for India's long struggle with inflation.

In Sub-Saharan Africa, in Rwanda, CPI fell to a 12-month low of 5.9% year-on-year in June after trending above 8% in both May (8.3%) and March 2012 (8.2%). The drop in CPI was due to a 1.0% drop in the prices of food, and a 2.6% decrease in the prices of utilities. The core inflation was unchanged in June, pushing the annual rate to a 16-month low of 3.6% down from 5.4% in May. 
 

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