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US Data Ahead of Possible 75 bp from FOMC later

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EURUSD,H1

The FOMC began its meeting and will announce its decision and ist new forecasts (SEP) at 18.00 GMT. Chair Powell will follow with his press conference at 18:30 GMT.

The markets now expect a 75 bp hike, and with some risk of a full 1 point boost. The markets are priced for two 75 bp increases, one each, in June and July and a total of 275 bps of hikes between now and year end, with a 3.5% to 3.75% funds rate band to end 2022. All eyes will be on the dot plot for what it shows in terms of the policy path and the terminal rate.

Expectations are for  big downward revisions to growth and huge upward boosts to the PCE chain prices.

Today’s data has not helped the mood music. US Retail Sales swings of -0.3% for the headline and 0.5% ex-autos followed downward revisions that left a much weaker trajectory than had been assumed for retail sales. The headline sales drop defied the lift from big price gains, leaving a weak “real” path for sales. Expectations are for a Q1 GDP growth boost to -1.1% from -1.5% in the last report. We assume a -$3 bln trimming in goods consumption that joins a -$8 bln adjustment for service consumption. The weak retail sales data, and surprisingly robust 2.8% surge for export prices despite a restrained 0.6% import price gain, prompted us to lower our Q2 GDP growth estimate to 2.8% from 3.5%, with 3.2% (was 3.5%) consumption growth after an estimated 2.8% (was 3.1%) Q1 rate.

The May US export price surge of 2.8% alongside a lean 0.6% import price rise followed temporary restraint for both indexes in April. The gains fell short of the outsized March gains of a record-high 4.2% (was 4.1%) for exports and an 11-year high of 3.0% (was 2.9%) for imports. May core trade prices posted surprising -0.3% declines for both exports and imports, though soaring petroleum and food prices lifted the headline. We’ve more generally seen a robust trade price trajectory since 2020, with bigger upside price surprises for exports than imports. Energy prices climbed further in June, and expectations are for  big June gains for the y/y trade price measures that will take the export y/y gauge to another new record high of 19.2%, following today’s record-high of 18.9%. Going forward, a surging Dollar may take some of the froth off these otherwise enormous trade price gains.

The US Empire State manufacturing index bounced 10.4 points to -1.2 in June after plunging -36.2 points to –11.6 in May. It was at a 22-month nadir of -11.8 in March, and an all-time high of 43.0 in July. The index was at 17.4 last June.

The USDIndex has recovered 105.00 from 104.50 earlier and trades at 105.15, EURUSD is back to test 1.0400 and USDJPY bounces from 134.50. Standby for 18:30 GMT. 

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Stuart Cowell

Head Market Analyst

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