Rates, stocks rise on less bad retail sales and U.S. & Chinese inflation

Retail sales dropped 0.2% in May, the first drop in 11 months, but economists were expecting a 0.4% to 0.5% drop so stocks are rallying on the news plus some favorable earnings today (S&P 500 +16 to 1288).

Meanwhile rates are up as mortgage bonds sell sharply (FNMA 4% coupon -62 basis points) on inflation worries in the U.S. and especially China. Rates rise when bond prices drop in a selloff, and bonds sell on inflation threats because inflation reduces buying power of a bond’s future cash flows. Today’s U.S. and China inflation data below.

U.S. May producer prices, a measure of manufacturing inflation, were relatively flat at 0.2 for the month but very high at 7.3% since May 2010. Excluding volatile food and gas prices, PPI was 0.2% for May and 2.1% since May 2010.

May consumer inflation in China rose 5.5% since May 2010, its highest level in three years, and economists don’t see relief soon.