Retail rebound

The market will get some insight into how much the consumer is participating in the economic recovery with the latest retail sales numbers today. S&P futures (SPX), Nasdaq futures (NDX:IND) and Dow futures (INDU) are all in the green.

The Commerce Department will release March retail sales at 8:30 AM ET. Economists, on average, are looking for a strong rebound, with sales rising 5.9%, compared with a 3% drop in February. Core retail sales, which exclude autos, are forecast to rise 5%, reversing a 2.7% decline the month before. Retail sales have posted gains in just four months since the lockdown measures took hold last year, the most recent being a 5.3% gain for January.

If sales rise as anticipated, that would be a good indication that the latest round of $1,400 direct checks are making their way into the economy, providing the stimulus intended by the White House. A miss may indicate that the money is being channeled to other avenues, such as savings or asset purchases. The New York Fed said last week that 42 cents of every stimulus dollar were being saved, while 25% of funds are being spent and the rest is being used to pay down debt.

Reflation trade: For the stock market, a strong retail sales number could kick-start the reflation trade that favors cyclicals, which has lost steam of late. Despite a number of market-moving events, the S&P (NYSEARCA:SPY) has struggled to gain traction in either direction and is down 0.1% for the week.

“The reflation trade has been taking a spring break,” says UBS Global Wealth Management CIO Mark Haefele. “We believe investors should continue to position for reflation” as vaccinations roll out and economies recover, he adds, according to Bloomberg. Financials (NYSEARCA:XLF), Industrials (NYSEARCA:XLI) and Energy (NYSEARCA:XLE) are likely to outperform.

Barclays strategist Emmanuel Cau says value is attractive as a hedge to overheating, but he's less positive on leisure, food retail and autos.

Economy accelerating, but still moderate: The Fed's Beige Book, out yesterday, said the U.S. economy is accelerating to a moderate pace, while some of the sectors hit hardest by the pandemic are showing signs of recovery.

"Reports on tourism were more upbeat, bolstered by a pickup in demand for leisure activities and travel which contacts attributed to spring break, an easing of pandemic-related restrictions, increased vaccinations, and recent stimulus payments among other factors," the report said.

Economic growth and consumer spending "accelerated over the last 6 weeks and pent-up demand for leisure activity and travel are starting to materialize," DataTrek Research writes. "Inflation has picked up and companies face both labor shortages and supply chain disruptions. In the end, we continue to agree with the Fed that near-term inflation is transitory rather than structural, so we don’t think Chair Powell will view these inflationary pressures as a major red flag."

"Moreover, the latest Fed Beige Book reports continue to show employers’ challenge of pulling workers back into the labor force," DataTrek adds. "That will take time as vaccines roll out and childcare becomes more accessible, factors that are out of Chair Powell’s control. That’s why he and the Fed continue to signal holding rates near zero through at least 2022 to let the economy run hot enough to achieve their dual mandate." (1 comment)