Long-term Treasury prices turned lower at midday Friday, making it clear that the Federal Reserve will need to cut rates to stimulate the U.S. economy.
For the past month Treasurys and stocks have had a teeter totter relationship, with one market gaining at the expense of the other as investors alternate cash flows between riskier and safer investments. At midday on Friday Treasurys gave back ground as stocks pared their losses, although they remained slightly lower.
The U.S. government said retail sales in August rose by a respectable 0.3 percent, but that gain was due entirely to auto sales. Without car and truck sales, retail sales dropped by a full 0.4 percent, confounding economists who had expected a gain.
The drop in U.S. retail sales excluding autos was the largest decline in a year and fed concerns that a contracting housing sector and troubled lending markets have hit the household level and slowed consumer spending. If the Fed perceives the consumer as being under siege, the bank will be more likely to cut rates when its monetary policy group meets on Tuesday.
"It looks like the housing sector is beginning to effect consumer spending," said Paul Kasriel, chief economist at Northern Trust. The consumer is one of the key drivers of the economy, he stressed.
The benchmark 10-year Treasury note fell 8/32 to 102 with a yield of 4.50 percent, up from 4.49 percent late Thursday. Prices and yields move in opposite directions.
The 30-year bond dropped 15/32 to 103 26/32 with a 4.76 percent yield, up from 4.75 percent on Thursday.
The 2-year note was 3/32 lower at 99 27/32 with a 4.08 percent yield, up from 4.05 percent on Thursday.
In other data news, prices of imported goods fell 0.3 percent last month, the first drop since January, according to the Labor Department. That news is good for Treasurys as it shows that inflation, which the bond market abhors, is not being intensified by goods from other countries. However, that report did little to shake the market's view that a rate cut is on the way.
Despite the new evidence that the consumer may be slowing, a University of Michigan survey showed sentiment at 83.8 this month, up a bit from 83.4 in August.
Another report showed industrial production in August rising 0.2 percent, the weakest increase in two months. Manufacturing activity dropped 0.3 percent, following five months of gains.
The Treasury market is fixated on the Federal Reserve's monetary policy meeting on Tuesday. There is little question in the market that the Fed will cut rates, although Fed officials have been careful to avoid saying this will happen.
The only debate among investors is whether the Fed will reduce rates by a quarter percentage point or a half point.
Kasriel said Northern Trust expects a a quarter percentage point cut next week, followed by more reductions. Northern Trust projects the Federal funds rate, currently 5.25 percent, will fall to 4.25 percent by late January.