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Focus on flurry of economic data - BBH

Ahead of the weekend, the chief focus is on the flurry of US economic data that will be reported today, according to analysts at BBH.  


Key Quotes


“Given investors and policymakers sensitivity to inflation, we have highlighted the importance of today's CPI report.  Core CPI fell for the past four months, and if this trend is arrested in June, as we expect, it could give Yellen instant gratification and move the flag a bit toward the Fed's argument about the transitory nature of the recent softening.  Despite many insisting that Yellen was dovish, we take seriously the line which the chair repeated in both her sessions, namely that it was "premature" to conclude that underlying inflation was falling short of its target.”


“A steady or even a small increase in core CPI will not end the debate by any means.  The Fed targets the core PCE deflator.  One month does not make a trend.  In our view, the various Fed comments are consistent with a sequencing that favors beginning of the balance sheet adjustment before the new move on rates.”


“The US reports June retail sales at the same time as CPI.  It may be difficult to determine which the market is reacting most to, but ideally, both reports will point in the same direction.  Retail sales are expected to have improved after the 0.3% decline was recorded in May.  That said, note that although retail sales are roughly 40% of personal consumption expenditures, the two times series do not always dovetail.  In any event, keep an eye on the GDP components of the retail sales report, which excludes items like autos, gasoline and building materials.  It was flat in May and is expected to have risen by around 0.3%.  The average for the first five months of the year is 0.36% and last year's average was 0.23%.”


“Also, June industrial production figures will be released shortly after the CPI and retail sales.  Industrial production and manufacturing output are also expected to have improved from May.  Industrial production is expected to increase by 0.3% after a flat reading, and manufacturing output can recover some of the 0.4% decline posted in May.  We note that capacity utilization peaked in late 2014 a little below 80%.  It stood at 76.6% in May.  The relatively low capacity utilization may speak to the subdued investment in plant and equipment, as well as the modest price pressures.”


“A few large US banks report earnings today.  Investors will also be monitoring developments with the Senate health care reform bill.  Two Republican Senators have already come out against it.  The challenge is illustrated by the fact that one is a moderate and the other hails from the libertarian wing of the party.  Several other Senators are on the fence and waiting for the CBO scoring.  The CBO scored the administration's budget in a similar way that the IMF judged the outlook for the US:  slow growth, a higher deficit, and more debt.”

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