Last Week - Soft Inflation, Weak Retail Sales, but Fiscal Concerns Push Yields Higher
The market received soft inflation data for July along with weaker-than-expected Retail Sales, which together have lowered the probability of near-term interest rate hikes: July Core CPI +0.215% month-over-month and +2.498% year-over-year, with the 3-month annualized Core CPI now running at +1.6% - trending toward the Fed's 2.0% target - and July Retail Sales falling -0.6% against a +0.1% estimate. The positive rate impulse from those prints was countered by a troubling July budget deficit of -$432 billion. After 10 months of the 2026 fiscal year the cumulative deficit stands at $1.8 trillion, projected to top $2 trillion by end of September; the national debt is approaching $40 trillion, and debt service has grown into one of the largest single line items in the federal budget. Concern about the long-term supply of Treasuries is putting upward pressure on long-end yields: last week's 30-year auction brought the highest auction yield since 2001 at 5.216%, and the long bond closed the week at 5.27%.