Treasuries began Thursday's session ascendant on initial stock weakness, but soon foundered on a brace of stronger-than-expected data that brought forward Fed tightening expectations. Fedspeak also played a central role, with San Francisco Fed's Parry recanting his June dissent in favor of a deeper rate cut then and expressing optimism about the recovery. Parry also said that "accommodative" policy doesn't mean the Fed will hold rates flat.
Washington Post's John Berry also cited a number of economists looking for third-quarter GDP growth as high as 7.5%. Core CPI remained muted at 0.1%, business inventories slumped 0.4%, initial claims eased 4,000 to 384,000, industrial production rose 0.4%, and capacity use gained to 74.7%. But the capper was the Philly Fed index, which exploded to 28, from 14.6, beyond the upsized whisper number following a strong New York Fed Empire State manufacturing survey yesterday.
The front-end of the curve suffered the deepest losses, with liquidation of Fed funds and eurodollar futures, implying a rate hike as early as the first quarter of 2004. The December bond closed down 12/32 at 105-31, while the Treasury-note yield pushed back above 4.45% and the 2-year note yield surged 20 basis points to 1.92%. The 2-year note and 30s-year bond spread sank like a stone, -14 basis points to +338 basis points.