Tomorrow's US Economic Data

There is a full slate of US economic reports on Wednesday.

The first reports are import prices and retail sales. The former typically is not a market mover. However, given the heightened concern that the US may be dangerously close to deflation, investors may be more sensitive to price data. Import prices likely fell for the second consecutive month--something that has not happened since late 2008/early 2009. The consensus forecast of -0.3% would bring the year-over-year pace to 5.3% from 8.6% in May. This would be the lowest year-over-year reading since last November.

There seems to be little correlation between the euro-dollar, dollar index or a trade-weighted dollar index and import prices, even when we play around with lag times. The bottom line here is that import prices do not appear to be offsetting softness in domestic prices.

June retail sales are expected to have contracted by around 0.3%, after falling 1.2% in May. This would be the first back-to-back decline since Feb-March 09. Most of the decline will likely be attributed to weakness in auto sales and a decline in gasoline prices. Excluding these two items, retail sales may have edged higher. May saw the first decline since July 09. With high unemployment, heightened job insecurity and serious financial uncertainty on many different levels, it is hardly surprising that the US consumer has withdrawn from the shop 'til you drop behavior.

Business inventories will be released at 10:00 EST/14:00 GMT. Many economists believe that the inventory cycle, in terms of contribution to GDP, may have peaked already. The May business inventories will likely lend credence to such ideas. The consensus forecast calls for a 0.3% increase. This follows a 0.4% increase in April. The average monthly increase in Q1 was 0.5%. Of course, there is a price component here that is next to impossible to forecast, but in general while inventory accumulation continues it appears to be happening at a more subdued pace.

The last report of the day is not data per se, but the minutes from the recent FOMC meeting. This also does not tend to be a market mover. However, this time it is likely to have added significance.

The FOMC minutes will likely contain two things that will interest investors. First, the Fed's staff is expected to have updated its forecasts. Both growth and inflation forecasts have likely be cut. Second, and which follows from the first, is that there may have been some discussion of what to do if inflation and growth are going to undershoot previous Fed expectations. One of the talking points that has emerged in recent days by a number of observers is a re-examination of Bernanke's 2002 speech about how the Fed could prevent Japanese-style deflation in the US. It is possible that a discussion of the Fed's options took place. However, judging from recent comments from a number of voting and non-voting Fed officials (Fisher, Hoenig, Lacker and Duke), the bar to a resumption of asset purchases seems relatively high. That said, if in fact there was such a discussion it could move the markets even if the Fed did not decide to act.

On balance, provided that the news from the euro zone remains benign (or at least the bad news, like Portugal's downgrade, can be offset with more constructive news, like a relatively favorable reception to Greece's bill auction), soft US economic data or price data, is generally speaking, dollar negative.

Last week, I warned that a weekly close above $1.2650 would set a new target for the euro into the $1.30-$1.31 area. The euro closed at $1.2640 last week. The technical condition, including the head and shoulders bottom formation suggest what we believe is an upside correction to the euro (and the major foreign currencies in general) can continue. Most immediately, today's high corresponds to the trend line drawn off last Nov's high and mid-April highs. A move above above $1.2740 lends credence to this constructive euro view.