Market Overview

US Retail Sales and building inflation is a case for Fed to signal tapering

US retail sales for May declined by 1.3% overall and 0.7% excluding autos, but thanks to upward revisions of the previous two months, this decline is not a cause for concern. Leaving aside the 28.1% y/y increase and high monthly volatility, we turn our attention to the sales trend in Millions of Dollars data. Since the start of 2021, there has been a sharp acceleration in retail sales. This has not been seen since the 2009 financial crisis and is unprecedented in history.

Strong retail sales are a factor in a faster unwinding of stimulus by the Fed. And it is not the only factor.

The producer price index rose 0.8% m/m and 6.6% y/y last month, significantly higher than the +0.5% m/m and +6.3% y/y expected. Producer prices are a leading indicator of consumer prices. At a time of strongly increasing final demand, retailers pass on rising costs further down the chain to consumers. Judging by the dynamics of retail sales, this is precisely the case.

Thus, there are more and more signals that the Fed will announce that it is ready to start tapering its asset purchases in the coming months as soon as this Wednesday. However, earlier in the week, the markets did not have much faith in such a scenario, so it would not be surprising if the dollar gains support and the stock markets come under pressure, acting on the principle “the better, the worse”.

The FxPro Analyst Team

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