AWS 5/13: Markets Should Stay on Course - Ahead of Wall Street

Zacks Investment Research
Posted: May 13, 2013 9:44 AM

Monday, May 13, 2013

The backdrop for today’s stock market action is coming from surprisingly positive April Retail Sales data on the home front and less than solid overnight numbers out of China. The Chinese retail sales and industrial production isn’t bad, they it nevertheless was a bit weaker than market expectations.

Media reports about the Fed’s plans to modify the bond-purchase program will also be in play. However, the odds of a cold-turkey shift on the QE front are low given the Bernanke Fed’s reputation for transparency and openness.

We start the week on a positive note from the economy, with April Retail Sales coming in better than expected. The expectation was for ‘headline’ Retail Sales growth to be in the negative territory given the decline in gasoline prices. But strength in autos, building materials, clothing and online purchases more than offset the gasoline sales drop – gasoline sales dropped by the largest amount since December 2008.

‘Core’ Retail Sales or the so-called ‘controlled group’, which excludes gasoline, autos, and building materials, were up nicely at +0.5%. Forecasters use the ‘core’ data in their GDP forecasts as a proxy for consumer spending.

Estimates for GDP growth in the current period were steadily coming down in recent days, but today’s report will likely help reverse that trend to some extent. It appears that consumers have not let the payroll tax changes and the budget sequester weigh on their spending behavior.

It isn’t clear at this stage what could be driving the steady trend in consumer spending. Perhaps they are dipping into their savings or may be wage growth has actually been better than what economic data has been showing. In any case, the Retail Sales strength is a net positive for the economy and is in-line with last month’s positive payroll reading.

Today’s soft pre-open sentiment notwithstanding, stocks remain at record levels and show no signs of changing trends. But signs of stability in the economy, as today’s Retail Sales numbers would show, would strengthen the hands of Fed hawks who want to curtail the pace of bond purchases.

Plenty of economic data this week about inflation, housing, and the manufacturing sector will shed further light on the state of the U.S. economy. But as long as there are no changes to the Fed outlook, the stock market can be expected to remain on its current course.

Sheraz Mian

Director of Research

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