US CPI Eyed as Yellen Reaffirms Rate Hike Plans

As Greek banks prepare to reopen on Monday following a two week holiday, German lawmakers are holding a crucial vote in the Bundestag on the Greek bailout deal which is expected to pass without any major issues. Meanwhile, U.S. data has a focus on inflation and the consumer, two factors that could prove key in the Federal Reserve’s decision to raise interest rates this year.

The European Central Banks decision to extend liquidity assistance to Greek banks after the Greek parliament voted strongly in favor of the deal, opened the door to the banks being reopened. The additional funds takes ECB support to just under €90 billion and will allow the banks to remain afloat while negotiations on the Greek bailout continue and cash is provided to recapitalize the banks which have suffered enormous withdrawals this year.

With Germany likely to approve the bailout today, negotiations on the terms of the bailout can begin, including the issue of debt relief which the International Monetary Fund is insisting on in exchange for it being involved. A haircut on Greek debt is not allowed according to German Finance Minister Wolfgang Schaeuble which leaves creditors with few options on how to make Greek debt more sustainable. The chances are this will be achieved through a long grace period on the debt followed by reductions in interest rates.

These talks are likely to be far less intense than those held up until a couple of weeks ago and with the threat of a “Grexit” significantly reduced, markets are likely to be far less responsive to them. Instead, focus is likely to switch now back to the fundamentals, in particular when the Fed and Bank of England will hike interest rates. Both could move to raise rates this year with Fed Chair Janet Yellen again reiterating that it will happen as long as the economy improves as they expected, while BoE Governor Mark Carney has recently become far more hawkish, stating yesterday that “the decision as to when to start such a process of adjustment will likely come into sharper relief around the turn of the year”.

The CPI and consumer sentiment data from the U.S. today will likely be tracked very closely with inflation potentially holding the key to any hike. A lack of consumer spending has prompted many people to question whether the Fed should hike this year without much evidence that inflation will pick up but higher wages and a tighter labour market are seen as being sufficient by the Fed to suggest that it will come.

While consumer sentiment readings, at the highest levels since the start of 2007, are not necessarily being matched by actual spending, they do suggest that consumers are bullish and therefore spending should follow. Inflation expectations also remain strong so there is no fear that consumers are merely delaying spending in anticipation of price reductions. Inflation is low at the moment but that is being largely driven by lower oil prices, the impacts of which should begin to disappear later this year.

We’ll also get housing data from the U.S. with building permits and housing starts for May being released. Stanley Fischer of the Fed is also due to speak in Washington which could offer further insight into the timing of the rate hike.

The S&P is expected to open 1 point lower, the Dow 56 points lower and the Nasdaq 22 points higher.

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Craig Erlam
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the BBC and The Telegraph, and he also appears regularly as a guest commentator on Bloomberg TV, CNBC, FOX Business and BNN. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.