The release of April CPI (unchanged core rate) did not have quite the same bang as the sharp drop in the PPI (-0.9% core) on Thursday. Still, this left core CPI at a water-logged 1.5% year-over-year rate, the lowest in forty years. Along with a steeper than expected 6.8% decline in housing starts to a 1.63 million unit annual pace, the data kept a bid in the long-end initially.
University of Michigan sentiment (93.2 vs 86.0) bucked the damp data trend of late and helped set up mid-session profit-taking on curve flatteners, which spilled over to long-end weakness. The market appeared to goad the Fed to ease ahead of Greenspan's testimony in front of the Joint Economic Committee next week, sharply boosting euro-dollar and Fed funds futures to imply about 70% odds of a late June cut.
The June bond ramped back up towards session and contract highs of 119-12 by the close, closing up 27/32 at 119-08. The 2s-30s spread widened back out 6 basis points to +310 bp, compared to week narrows of +300 bp and month wides around +330 bp.
The dollar remained defensive ahead of the G7 finance ministers meeting in France, which appears likely to be acrimonious.