Given the hawkish statements weve seen from Federal Reserve policy makers lately, its not surprising that US markets have been looking towards policy tightening. Prices… … on US Treasury Notes have plunged over the past month, the US dollar has shown a brisk rally against the Euro over the past week, and the S&P 500 has declined during 4 of the past 6 trading sessions.

The release of Advance Retail Sales may only add to
this sentiment, as the figure is anticipated to surge 0.7 percent during
May after contracting 0.2 percent the month prior, signaling that the US
consumer is just as resilient as ever and that the soft April reports
were just a one-off event. There is some downside risk given the sharp
rise in gasoline prices, but second and third-tier reports indicate
otherwise. The ICSC-UBS indicator showed a 2.5 percent jump in sales by
chain stores, while SpendingPulse reported a 0.3 percent pick up
ironically, led by a rise in gasoline prices while the core reading
showed a comparable gain of 0.2 percent. However, if we see a
softer-than-expected Advance Retail Sales result, US markets may not be
prepared to brush off hawkish expectations for the Fed ahead of the
release of CPI on Friday. Furthermore, added event risk on Wednesday
comes from the Feds Beige Book Report, which will serve as a preview
for commentary from the FOMCs next meeting on June 28th. The report
will likely reflect health in the manufacturing sector in line with the
ISM survey, softness in housing construction, and inflation at
uncomfortably high levels all of which should keep the Feds
stance relatively unchanged, barring a sharp pick up in CPI this week.

Bonds – US 10-Year Treasury Note Futures

US Treasury Note prices have taken a sharp dive lower, hitting last
Fridays low of 104.04 but ending the day a nudge higher at 104.05.
Government bonds around the world have been subject to similar price
action given hawkish expectations for several central banks, but
commentary by multiple FOMC members regarding their discomfort with
current inflation levels has certainly not helped the case for
Treasuries. Wednesday holds significant event risk with both Advance
Retail Sales and the Feds Beige Book due to be released. Will this
fragile level of support be able to prevent another steep decline? If
both releases significantly underpin the case for an increasingly
hawkish bias by the Fed, it is unlikely, especially as the next level of
support lies at the pivot low of 103.26.

FX – EUR/USD

EUR/USD has already broken through not only trendline support, but also
the 100 day SMA. While the 1.3300 level should manage to hold further
losses for the pair back briefly, EUR/USD may not stand a chance on
Wednesday as Advance Retail Sales are anticipated to rebound while the
Feds Beige Book could reflect a fairly rosy view of the economy with
the exception of housing construction.

Given the fact that the US dollar has been riding the wave of hawkish
commentary by multiple FOMC members, even results that miss expectations
could propel further gains. The next layer of support for EUR/USD lies
near the confluence of an ascending trendline, the 61.8% fib of 1.2866 –
1.3684 at 1.3180 and the 200 day SMA at 1.3110. However, if we see no
change or contraction in the Retail Sales report, the bearish data could
buoy EUR/USD. Nevertheless, technical factors favor a decline towards
trendline support, and fundamental data appears to be lining up just
right to perpetuate the move.

Equities – S&P 500 Index

US stocks fell after the bear market in bonds pushed yields to a
five-year high and increased concern that the pace of takeovers may have
peaked along with corporate profits. Meanwhile, all 14 real-estate
companies in the S&P 500 and every homebuilder retreated on speculation
that high interest rates will maintain slower economic growth, with the
S&P closing out the day down 1.1 percent at 1,493.00. Financial shares
exerted a large drag on the S&P 500 as well, falling 1.1 percent as a
group. Citigroup Inc., the world's biggest financial firm, fell 87 cents
to $52.60 while Bank of America Corp., the second biggest US bank,
slipped 39 cents to $49.66.

Looking ahead to Wednesday, US equities could be in danger once again
as both Advance Retail Sales and the Feds Beige Book are due to be
released. With the prevailing concerns of the markets remaining that the
Federal Reserve will remain hawkish, economic reports that underpin this
sentiment will only be exacerbated. However, the S&P 500 has had trouble
breaking down below 1,490, where a series of lows and the 50 day SMA
have formed support. As a result, losses for the index could be limited,
but if the data leads equities to weigh heavily enough on the level, US
shares in general could see very steep losses.

DailyFX Research Team
Forex Capital Markets LLC
32 Old Slip, 10th Floor
New York, NY 10004
Tel (212) 897-7660
Fax (212) 897-7669
E-mail: research@dailyfx.com

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