Weak US inflation, retail sales data dim rate hike prospects

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The gasoline index fell 0.4% over the past 12 months, while the other major energy components have gained over the same time period. The yield was at 2.31 percent in late morning trading.

The Dow and S&P 500 both closed at new records while gauges of global stock markets also scaled fresh highs, capping their best week in more than two months.

Barclays chief US economist Michael Gapen said the soft data does not change his view that the Fed will start unwinding its balance sheet in September and raise interest rates in December. Some had been expecting another rate hike in 2017.

"I would like to see some greater evidence that we are making progress toward meeting our 2% inflation objective in the medium term", he said in an essay published on Thursday. "The risk is they alter their path for next year".

The U.S. consumer price index increased 1.6 percent, the smallest gain since October 2016, after rising 1.9 percent in May, the Labor Department said.

The index climbed by 1.6% year-over-year, below expectations of 1.7%. The consumer is employed, but retail sales aren't going very fast. "It's a structural threat to their existing business, and they're competing against it", Gapen said.

There were also decreases in airline fares and prices for apparel, household furnishings, new motor vehicles, and used cars and trucks. "Dollar-yen has got a lot more downside and it could easily go to 110 yen before the summer is out, in fact the next few weeks, especially with US yields heading lower", Franulovich said.The higher yielding Aussie and New Zealand dollars jumped, with the Australian dollar hitting a near 15-month high as risk appetite was robust with global stock markets hitting record highs and after dovish comments from global policymakers.The Aussie was 1.23 percent higher against the greenback at $0.7821.South Africa's rand hit a two-week high against the greenback.The euro was up 0.62 percent against the greenback to $1.1466 and sterling was 1.18 percent higher at $1.3088, after hitting $1.3093, its highest since September, 2016. Retail sales rose 2.8 per cent year-on-year in June.

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The Fed has a 2 per cent inflation target and tracks a measure which is now at 1.4 per cent.

The June inflation reading has taken on extra importance because several voting members of the policy-setting federal open market committee have signaled they won't support future rate increases unless they see proof that the slowdown will be short-lived. Janet Yellen's description of inflation changed from idiosyncratic to unusual.

"I think it will be a delayed process", said Robert Sinche, chief global strategist at Amherst Pierpont.

The Fed has a target of 2 percent inflation, and core CPI had been at that level throughout 2016.

A supply interruption in Nigeria boosted crude oil and prices posted a weekly gain of more than 4 percent on lower US stockpiles.

It has been an eventful week for the financial markets, as comments from central bank heavyweights which fuelled monetary policy speculations and political uncertainty in Washington, breathed life back into the currency and equity markets.

"People have been whipsawed by central bankers in the last couple of weeks", he said. "All that matters is inflation", he said. "Low inflation is the theme of the summer", he said.

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