Today’s shower of data fell on a market that knows any hint of present or future inflation remains non-existent, but must stay ever-wary of a Fed that remains committed to output-gap austerity. After initially rallying to their best levels in three months at a yield below 5.80% on word of June core  producer prices declining by 0.1%, long-term Treasuries could not withstand the beating being taken at the short end of the yield curve. While the 30-year bond took a near full-point loss, pushing the yield to 5.88%, the two-year note suffered a 12 basis-point rout, back above the 6.4% level, with the yield curve inversion deepening to more than 50 bps for the first time in two weeks.  With the market’s optimism that the Fed was at or near the end of its tightening cycle now in doubt, Alan Greenspan’s scheduled Senate Banking Committee testimony next Thursday takes on even greater urgency.

A major factor in today’s expectations shift, it seems, was the revision of previous months’ retail sales data. Ex-autos, June sales gains actually came in weaker than expected, at 0.2% versus expectations of 0.3%. What surprised the market, and no doubt put an “I-told-you-so” grin on the face of Laurence Meyer and his Phillips-Curve brethren, was the update of the May release showing a 0.3% gain versus an originally reported 0.3% decline. As one report noted, release of the initial May number last month was one of the key indicators in the then-developing slowdown scenario. Of course, two-month-old data on consumer consumption behavior is entirely irrelevant to current or expected inflation. As noted here yesterday, though, the Fed’s lagging fine-tuning approach requires that contemporaneous policy decisions be based on data reflecting past economic performance. Even today’s report that industrial production rose by just 0.2%, its slowest pace of growth since last September, wasn’t enough to turn back the bearish tide. Under the Fed’s output-gap model, even a slower pace of “aggregate demand” growth could remain well above the level deemed to represent  “sustainability.”