US treasury outlook: retail sales focus

US Treasuries could struggle to shake off a gloomy mood next week, with economic data and several Federal Reserve speakers unlikely to change investors' conviction that there would no interest rate cut this year.
The start of the corporate earnings reporting season could also add to the government bond market's woes as companies are generally expected to post relatively strong profits, reflecting a fairly healthy economy, analysts said.
That could see investors shifting money from Treasuries into equities in search of higher returns. Bonds have been hammered as data pointed to a strong economy, dashing hopes that the Fed would ease monetary policy later this year.
Key reports due next week include June retail sales, expected to show slower growth in consumer spending, and the July Reuters/University of Michigan consumer survey.
"This could remind the market that there is some risk of the Fed having to ease if the consumer stops spending," said Matthew Moore, economic strategist at Banc of America Securities in New York.
"But with the strength in the production data we saw this week, with the ISM manufacturing and non-manufacturing indices at a 14-month high, and the decent payrolls growth, it does seem like the Fed is on hold."
A surprisingly strong June nonfarm payrolls report sent government bonds tumbling on Friday, with the yield on the benchmark 10-year note jumping to a two-week high of 5.21 percent, versus 5.14 percent late on Thursday. There was scope for the 10-year yield to rise as high as 5.28 percent, particularly if corporate earnings came in stronger as expected, analysts said.
"There have been very few announcements of companies missing their quarter (earnings forecasts)," said Georges Yared, chief investment strategist at Yared Investment Research, in Minneapolis, Minnesota.
"So we are going to see some strength coming out of the second quarter earnings numbers and we could see the 10-year top 5.25/28 percent, not being driven by inflation, but more being driven by growth." Investors will watch speeches by various Fed speakers, including Chairman Ben Bernanke, for fresh clues on the monetary policy outlook, but no surprises are anticipated.
The Federal Open Market Committee last month dropped the word "elevated" from its description of core inflation when it left the overnight fed funds rate unchanged at 5.25 percent. Bernanke will speak on inflation. Recent data have shown core inflation, excluding food and energy, subsiding close to within range of the 1-2 percent "comfort zone" of some Fed officials.
"I don't think he will use the word under control. He will probably say within the range of favorability or acceptability. I have a feeling that he will probably be a bit more positively influenced than negatively influenced," said Yared.
"It will not change the rate outlook. The Fed is taking the rest of the year off when it comes to the interest rate scenario. They are pretty much settled on the fact that we are going to have the fed funds rate stay at 5.25 percent."