It’s been a sluggish start to trading on Friday as traders await inflation and consumer spending numbers from the US that could add a further dovish layer to Janet Yellen’s comments on Wednesday.
It’s become very clear in recent weeks that an increasing number of Federal Reserve policy makers are becoming concerned about persistent subdued inflation despite evidence suggesting that the labour market is tightening, typically a trigger for stronger wage growth and higher prices. Fed Chair Yellen highlighted this herself to the Senate Banking Committee on Wednesday, an admission that weighed on US Treasury yields and the greenback while supporting stocks in the process.
We don’t have the plethora of policy makers making appearances today, with only Robert Kaplan scheduled to appear, but the US data that is due should fill that void quite nicely. Given Yellen's, amongst others, comments in recent weeks, the CPI data will clearly attract a lot of attention, even if it isn’t the Fed’s preferred measure of inflation. The core PCE price index – the preferred report – typically comes a few weeks after the CPI and while the numbers tend to differ a little, the direction of travel is generally similar so the latter does offer value.
While headline CPI is expected to fall to 1.7% in June, from 1.9% in May, core CPI is seen unchanged also at 1.7%. This isn’t going to put policy makers fears at ease at all, particularly given that PCE is lower again. Should we see a larger decline then the yields and the dollar could be prone to slipping again, with the probability of another rate hike this year likely taking another hit, despite only sitting marginally above 50% currently.
The retail sales release, coming at the same time, is also a huge number given the importance of the consumer to the US economy. Markets could therefore become very volatile prior to the open, particularly if both numbers disappoint. We’ll also get earnings from JP Morgan, Wells Fargo (NYSE:WFC) and Citigroup (NYSE:C) today which could make it quite a lively end to the week.
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