Fed keeping close eye on June retail sales and consumer prices - BBH

Research Team at BBH, suggests that the US data highlights typically include consumption and price readings after the employment report.  

Key Quotes

“However, the retail sales and CPI reports that will be reported at the end of the week may offer little than headline risk.  It is a busy week for Fed officials.  No few than ten Fed officials speak this week, but not any from the Troika (Yellen, Fischer, and Dudley) from which we argue policy emanates.  The fact of the matter is that this month's FOMC meeting will come and go with little fanfare.

If the Fed is to move in September, which the market says is highly unlikely, it will not be because of June retail sales and consumer prices.  Retail sales may be held back by the serial decline in auto sales (which are still at elevated levels), but the story of Q2 is the recovery in consumption.  Consumer prices likely remain firm.  The core rate is expected to remain steady at 2.2%.  It has been above 2% since last October.  The headline rate is expected to tick up to the top of the narrow (0.9%-1.1%) range that has prevailed since February.  

We note that since the UK referendum, the Fed funds rate has firmed to around 40 bp.  This is 3-4 bp rich compared with the rates that prevailed previously.  The October Fed funds futures contract (the best gauge in the futures market for the September 21meeting which is held late in the month) closed before the weekend at an implied 40 bp and the December Fed funds futures closed at 41 bp.  

The US Q2 corporate earnings season formally kicks off with Alcoa today.  Q2 is expected to show the sixth consecutive quarterly decline in sales and the fifth straight decline in earnings.  If there is good news to be found in the aggregate, it is that the pace of decline is slowing.  S&P 500 earnings are projected to fall about 5.5% after a 6.6% decline in Q1, while sales are expected to slip 0.9% after easing 1.5% in Q1.  With the market at record highs, it appears liquidity rather than earnings has been the driver.”