Import Price Index (JUN) (12:30 GMT; 08:30 EST)
Expected: 0.7%
Previous: 0.9%

Advance Retail Sales (JUN) (12:30 GMT; 08:30 EST)
Expected: -0.1%
Previous: 1.4%

How Will The Markets React?

On Friday morning, the release of the US import price index and advance retail sales hold major market-moving potential, as the news will reflect two of the most important topics relating US asset trading: inflation and consumption. First, while import price growth is anticipated to slow in June to 0.7 percent, the figure is still relatively buoyant and will likely be supported by high petroleum product prices. Nevertheless, core inflation (CPI excluding food and energy) remains the Federal Reserve's predominant concern, so an oil-price led increase in import costs may not lead to extremely hawkish Fed expectations. Meanwhile, advance retail sales are estimated to fall 0.1 percent in June after surging 1.4 percent in May. With average gasoline prices over $3/gallon during that period, the decline is likely to be led by a slump in automobile purchases, as cars and light trucks sold at a 15.6 million annual rate in June - the slowest since October 2005. Excluding automobiles, retail sales are still anticipated to slow substantially to a rate of 0.2 percent from 1.3 percent the month prior. However, there are risks to both the upside and the downside. Good news first: stores like Wal-Mart and Costco have reported better-than-estimated sales results in June. Now the negative: Wal-mart has said that the jump in sales was generally due to price discounts, while Home Depot Inc. and Sears Holdings Corp. warned sales and profits will be weaker than expected, partly blaming the woes in the housing sector. Meanwhile, Macy's, JC Penney, and Kohl's all reported disappointing results on soft apparel sales. US markets are likely to respond in similar manners to Friday’s data. If the import price report is softer than estimates, bonds and equities are likely to rally while the US dollar will continue to take on additional losses. However, the combination of upside surprises in both the inflation report and retail sales figure will lead the markets to consider the possibilities of policy tightening by the Federal Reserve later this year.

Bonds – US 10-Year Treasury Note Futures

The return to risk appetite saw Fixed Income markets shed a good portion of very recent advances, with the 10-Year Treasury Note futures losing down to 105-04. However, support at the 104-27/105 level could prevent additional losses, especially if import prices and retail sales hit the tape at softer than expected levels, as markets would be little swayed to price in Fed tightening. On the other hand, signs that both inflation and consumption are growing could send Treasuries plummeting lower.

FX – EUR/USD

As traders desperately search for a top in EUR/USD, the release of US economic data regarding both inflation and consumption will draw a significant amount of attention. However, the estimates for Friday’s import price index and retail sales figure may only push the pair up to 1.3800, as price growth is expected to ease while consumption is predicted to take a hit. These factors would be highly bearish for the US dollar, as the markets will see such data as a signal that the Fed will remain on hold throughout the rest of the year, despite their persistently hawkish stance. Nevertheless, 1.3800 represents a psychologically important level for EUR/USD, so a sell-off of the US dollar to that figure may be capped. Furthermore, the move could result in a sharp turnaround, especially if the data is mixed, as dollar bulls waiting in the wings will be looking for any reason to fade the overextended pair.

Equities – S&P 500 Index

US stocks rallied on Thursday, sending the S&P 500 up 1.9 percent to close at a record high of 1,547.70 after Wal-Mart Stores Inc.'s sales and a surge in exports improved prospects for economic growth. Wal-Mart shares advanced 2.4 percent to $48.83, as June sales grew 2.4 percent, exceeding the company's forecast of 2 percent. Target, the second-biggest U.S. discount retailer, jumped 6.8 percent to $70.04. Meanwhile, Costco added $1.02 to $61.74 after the largest US warehouse club said June same-store sales increased 6 percent, exceeding the estimate of 5.9 percent.

On the other hand, retailers such as JC Penney, Macy’s, and Kohl’s showed disappointing sales figures for the month of June, signaling the downside risks to Friday’s Advance Retail Sales report. However, given the clearly bullish sentiment of US equity markets, traders may be hard pressed to sell off equities unless the spending figures come in much worse than expected. As a result, readings in line with estimates should allow the S&P to take on new highs above 1,550.

Terri Belkas is a Currency Analyst for FXCM.