Market Insider

Retail sales seen strong while traders stay on taper alert

Shoppers at a Toys R Us store in Arapahoe County, Colorado.
Karl Gehring | The Denver Post | Getty Images

November retail sales are likely to show their best gain since February, on the back of superstrong auto sales.

The retail number is important because it is one of the last pieces of major economic data ahead of next week's Fed meeting. That meeting is the markets' key focus as expectations for the Fed to slow its bond-buying program have been rising since Friday's stronger-than-expected jobs report.

Economists expect retail sales to be up 0.6 percent for November, besting October's 0.4 percent gain. The number is released at 8:30 a.m. ET Thursday, the same time that import prices and weekly jobless claims are reported. Business inventories are at 10 a.m.

Tom Simons, money market economist at Jefferies, said that, excluding autos, he expects to see just a 0.2 percent gain in retail sales. Auto sales hit an surprisingly high annual selling pace of 16.4 million in November.

"I'm just saying we already know what the strength is," he said. "We would like to see a number that's healthy, with good car sales, but we're not likely to see that. The consumer is still pretty cash-strapped in a broad sense. The average hourly earnings have been weak for a long time."

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Simons is in a growing minority camp that believes the Fed will use the Dec. 17 and 18 meeting to launch a tapering of its $85 billion a month in bond purchases. CNBC's Steve Liesman reported that the Fed is increasingly likely to move toward tapering at that meeting.

Simons expects to see an initial $5 billion cut in Treasury purchases.

Andrew Wilkinson, chief economic strategist at Miller Tabak, also foresees tapering next week and has been expecting it for a while because of improvements in the labor market.

Thursday's weekly jobless claims should continue an improving trend, he said.

"We've seen this very reasonable trend of declining jobless claims. The market keeps getting it wrong week after week," he said. "Claims continue to decline and you've got to ask yourself why is that. It becomes a little more evident in the jobs number. We're seeing broad-based strength in the labor markets."

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Wilkinson also said retail sales could be stronger than some project and that the consumer is more resilient.

Talk of an accelerated tapering has been gaining momentum since Friday's report of 203,000 nonfarm payrolls in November and has made for a rocky stock market this week. The Dow lost 129 points Wednesday, to 15,843, and the lost 20 points, sliding to 1,782. The S&P is now down 1.3 percent for the week.

Economy supportive of taper: Pro
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Economy supportive of taper: Pro

Tuesday's budget deal in Washington was greeted as a negative, despite the fact that it means that congressional brinksmanship will not threaten to shut down the government for two more years.

"Apparently everybody's still talking about [Congress] making it easier for [the Fed] to start tapering early because of the deal," said Art Cashin, director of floor operations at UBS.

The 10-year yield could also be a factor for stocks, he added, but it did not really start to move to its afternoon highs until well after the auction. It was trading at 2.84 percent late Wednesday.

The $21 billion in reopened 10-year notes was priced to yield 2.824 percent, compared with its yield of 2.817 when issued and November's auction yield of 2.75 percent. The bid-to-cover ratio was 2.61 times compared with 2.7 times in November and below the six-auction average of 2.75 times. The participation rate of direct bidders fell to 10.6 percent from 18.6 percent in November.

"The 10-year auction was lousy. It needed a flea collar," Cashin said, adding that if the 10-year yield gets too close to 2.9 percent it will be a negative for stocks. He does not expect the Fed to move next week, but it could discuss winding down the QE program in its statement.

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"Direct participation was on the weak side, which I think creates some risk for tomorrow's bond auction," Simons said. "If [bidders] are here, they're here for 3s, 10s and bonds. So far, participation in the auctions this week has not been great."

The action in Wednesday's 10-year auction showed a lack of interest, Simons said, not necessarily a view that the Fed would move to taper its bond purchases. The Treasury auctions $13 billion in 30-year bonds at 1 p.m Thursday.

Steve Massocca at Wedbush Securities said he think the stock market has been selling off because investors are sitting on huge gains.

"I think the selling was tax-related," he said, adding that poor-performing stocks are getting dumped for tax-loss selling.

"There's not a lot of value out there anymore in certain areas," Massocca said. "The names that have been bought and are the hot stocks have gotten expensive. It's a bifurcated market, and you have stocks that have done well all year, but the valuations are such that they're not a compelling buy right now. … They're selling the losers and those tend to be the names that are cheap right now. I think it's a unique set of circumstances related to the calendar."

—By CNBC's Patti Domm. Follow here on Twitter @pattidomm.