Dollar and Treasury yields slide as US data disappoint

Tuesday 17:00 BST. The dollar and Treasury yields stumbled as softer than forecast US retail sales data caused traders to push back expectations for when the Federal Reserve may start raising interest rates.

US and European equities were mixed as traders absorbed the latest update on the world's biggest economy and also parsed a raft of corporate news, after Hong Kong's rally showed signs of fatigue.

The S&P 500 was up just one point to 2,093 at midday in New York, despite well-received earnings from JPMorgan Chase and Johnson & Johnson.

The US retail sales figures did little to spook bond investors or impress economists. Retail sales in March rose 0.9 per cent on the previous month, the biggest rise in a year, but below analyst forecasts for a 1 per cent increase. Core sales, which strip out the more volatile components, rose just 0.3 per cent against expectations of a 0.5 per cent jump.

"A rebound in retail sales in March provides evidence that the US economy is pulling out of a soft patch seen at the start of the year. The upturn plays into the hands of policy makers wanting to start raising interest rates in coming months," said Chris Williamson, chief economist at Markit.

"However, the revival is far from convincing, which suggests that the majority of rate setters will want to see further evidence of a strengthening economy before committing to any tightening of policy."

The Treasury market moved strongly on the report: US two-year bond yields, above 0.7 per cent in March, slipped 4 basis points to 0.5 per cent, while 10-year paper fell 7bp to 1.86 per cent, compared with 2.25 per cent five weeks ago.

The dollar index, which had flirted with 12-year highs just above 100, was down 0.9 per cent to 98.60.

The retreating dollar helped gold bounce off a session low of $1,184 an ounce to change hands at $1,196, just $2 cheaper for the day.

Across the Atlantic the FTSE Eurofirst 300 closed 0.5 per cent lower, retreating from its best close since November 2000, even as traders' animal spirits were piqued by news of a possible merger between Nokia and Alcatel-Lucent .

Ten-year Bund yields eased 1bp to a record low of 0.14 per cent, reflecting the European Central Bank's €60bn-a-month bond-buying programme and probably some "haven" flows as investors again worried about a possible Greek default. Athens' three-year implied borrowing costs were up 167bp to 23.1 per cent and the Greek banking index fell 2.2 per cent.

The slight tightening in the US/EU yield differential saw the single currency jump 0.9 per cent to $1.0668, also bolstered by news that eurozone industrial production rose more than expected in February.

Sterling turned a loss into a 0.8 per cent gain to $1.4785, though 10-year gilt yields slipped 8bp to 1.51 per cent after consumer prices data showed UK inflation at zero in March.

In other currency action, the Singapore dollar was up 0.9 per cent against its US counterpart after the Monetary Authority of Singapore, the country's central bank, kept policy steady by maintaining the current slope of its currency band - its main monetary policy tool.

About half of the economists surveyed by Bloomberg had expected the MAS to loosen policy further, but policy makers offered an upbeat take on the economy and said GDP was on track to grow 2-4 per cent this year.

Meanwhile the Hang Seng index fell 1.6 per cent, breaking an eight-day rally that pushed it up 14.4 per cent to beyond 28,000, the highest in seven years.

On the mainland the Shanghai Composite climbed 0.3 per cent, taking its advance so far this year to 28 per cent.

Still, the pace of the Shanghai advance is slowing and the cooling-off came a day before China releases first-quarter gross domestic product data that could show the economy growing below Beijing's 7 per cent target.

Base metals seemed wary about the impending report, with copper off 1 per cent to $5,923 a tonne in a mostly downbeat sector. In energy, Brent crude was up 1 per cent at $58.53 a barrel.

However, if the bullish response to Monday's weak trade data are anything to go by, a poor report could augur well for stock markets as investors bet on further stimulus to support the economy.

Analysts said that after the quick gains of last week it was no surprise investors were reassessing just how far to push the rally, but added that the profit-taking in Hong Kong does not appear to indicate an end to the run. The rally has been driven by a herd of retail investors from the mainland snapping up perceived bargains, and the argument that Hong Kong is comparatively cheap still holds.

Other markets in the region were under pressure, with investors reluctant to push them past key thresholds. In Tokyo, the Nikkei 225 was flat just shy of the 20,000 mark, while in Sydney the S&P/ASX 200 fell 0.2 per cent, about 50 points adrift of the 6,000 level.

Reporting by Patrick McGee in Hong Kong, Jamie Chisholm in London, and Anna Nicolaou in New York

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