Stocks ease ahead of Fed, pricing pressures grow, Retail Sales drop, mixed dollar, bitcoin bulls are back

US stocks are slightly softer heading into the FOMC as the stimulus boost wanes, inflation fears grow, and the economic recovery shows signs of softening.  A wrath of US economic data delivered a somewhat mixed picture for Fed policy, but mostly confirmed a wait-and-see approach for the Fed.

US Data

Retail Sales dip, PPI jumps

Consumer activity is falling as prices continue to rise and as money heads into the service sector.  Retail sales (ex-auto) in May showed an unexpected decline of 0.7%, a big miss of the expected 0.4% gain.  The car market is still filled with inflated prices and many consumers are content waiting till the end of the year to buy a car.  Less stimulus, slowing car demand, and pricing pressures helped deliver a headline drop of 1.3%.  Upward revisions occurred across all of the April retail sales readings, so that should help with the second quarter growth readings.

Big increases in producer prices in May supported the growing argument that the US consumer is going to see higher prices in the near future.  The 6.6% annual surge in PPI was the largest on record and provides further ammunition for businesses to pass on higher costs to the consumer.  The argument that this rise in pricing pressures will be transitory still holds.  The majority of the May increases for final demand looks like it could be temporary as the chip shortage should be rectified in the coming months and as many commodities have started to pull back.

The June Empire State Manufacturing survey declined but is still showing strength.  New orders dropped from 28.9 to 16.3, while Shipments fell from 29.7 to 14.2.  Transitory inflation bettors pounded their chests after seeing both prices paid and received drop a few percentage points. This survey will closely be compared across the other regional surveys and if a repeat happens next month that will start to draw more attention over a slower recovery and nearing a possible peak in pricing pressures.

FX

The dollar was mixed against its major trading partners as commodity currencies continue to slide and the euro was bolstered after Germany’s CPI report showed inflation continues to rally above the ECB’s inflation target.  The Bundesbank also raised their inflation outlook for this year to 2.6% and noted they would not be surprised to see it reach 4% by year-end.  Higher yields and a slightly risk-off tone are driving some flows into the dollar.

The dollar was unfazed after a strong 20-year auction.  Investors fought to get their hands on 20-year bonds which means that many are expecting lower bond yields for a lot longer.

Cryptos

While the rest of Wall Street struggles to lock in any meaningful positions ahead of the Fed, bitcoin bulls have been louder than ever that crypto fundamentals have shifted back to bullishness.  A plethora of endorsements from Musk and Tudor Jones, successful offerings from MicroStrategy, and the first network update in four years have helped Bitcoin rally back around the USD40,000 level.

Bitcoin has had a good week, as investors become more optimistic that ESG concerns will quickly be addressed in the coming months, smart contracts may launch in November following the Taproot upgrade, and as crypto traders anticipate upcoming regulations will likely lead to a consolidation of cryptocurrencies that should benefit the dominant players.

Heading into the FOMC, bitcoin could see limited downward pressure if a less dovish Fed sends the dollar bouncing back.  Bitcoin has shown it is reading to rally beyond the USD30,000 to USD40,000 trading range.  Post any Fed-driven weakness, bitcoin should find the USD42,500 as the next key resistance level.

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