US CPI and Retail Sales Preview: Inflation at standstill while retail sustains rebound - TDS

Research Team at TDS, suggests that a rare simultaneous release of US retail sales and CPI will describe a backdrop of very subdued inflation with continued momentum in consumer spending.

Key Quotes

“Relative to the market expectation, we are a touch below the market for CPI and see an upside risk for consumer spending. For the Federal Reserve, the inflation data is likely to take on greater importance as the inertia in headline CPI will inform the risk around developments in inflation expectations (note the UMich consumer confidence series will be released later in the morning).

CPI: The headline CPI index is forecast to rise by 0.2% m/m (up 0.172% at 3 decimal places) in June. Much of this increase will be driven a 1.0% increase in energy prices which should more than compensate for an expected decline in food costs. Unfavourable base year effects will keep headline inflation unchanged at a modest 1.0%. Soft goods prices and an expected deceleration in service costs are forecast to restrain the core price index to a 0.1% monthly advance (0.135% at 3 decimal places). Core inflation is expected to remain unchanged at 2.2%.

Retail Sales: Despite a drop in auto sales, headline retail sales are forecast to have increased by 0.3% m/m in June. Excluding autos will leave sales 0.5% higher while core retail sales are expected to match the headline at 0.3%. The momentum in consumer spending reflects reasonably firm domestic fundamentals.

Foreign Exchange: A greater focus likely to be placed on the inflation data along with our downside bias for our already below market expectation, we think the risks lilt lower for the USD. We do not believe this will be a slam dunk case for the USD to spiral lower, but we view it in the context that softer inflation will weigh on Fed expectations. Indeed, Fed odds for a hike in December have scaled higher to 40%, and real rates have closely tracked alongside. Taken in conjunction with the divergence in real rates between bunds and treasuries would favour tactical topside in EURUSD. First level of resistance comes in at the 1.12 figure.”