Last week’s tepid US CPI readings and the weak NFP readings the week before that have cooled traders expectations of Fed rate hikes going forward with the market essentially pricing in the prospect of only 3 hikes this year.

Fed officials, however, continue to assume a hawkish stance with Cleveland President Mester reaffirming the view that inflation may go above the 2% range. So far the Fed analysis has been far too optimistic core CPI readings did push through the 2% ceiling last month – but only just – marking only the second time this year that the core readings have risen above the 2% level.

Part of the reason for muted inflation readings is the woefully slow gains in average hourly earnings. Given the tax cut, the stimulatory aspect of fiscal policy and the relative tightness of the labor market, economists expected nominal wages to rise between 3.5%-4.0% by now, yet the gains have only been 2.6% creating very little real wage growth for the US consumer.

Tomorrow’s US Retail Sales will provide the most important view of the state of US final demand. The market is anticipating a rebound in US Retail Sales of 0.5% from 0.2% the month prior. If Retail Sales improve USDJ/PY will make another run at 110.00, but if the number misses its mark once again and shows a paltry growth of 0.2% or worse, the Fed futures market will start to pare its bets regardless of what the Fed officials will say as evidence will continue to mount that case for further tightening is simply not there.