The down and out U.S. consumer may be about to play a bigger role in the economic recovery.
Markets hinge Friday on two key pieces of data tied to the consumer - retail sales for February and the University of Michigan consumer sentiment report. Those releases come a day after stocks returned to their January highs and now face an important technical pivot point.
The S&P 500 closed Thursday at 1150, its high on Jan. 19. The Dow seesawed back and forth in a 100 point range, crossed the zero mark 53 times and finished at its highs of the day at 10,611, up 44 points. That was the higest Dow close since Jan. 19.
Economists expect February retail sales to decline of 0.2 percent, even though chain stores last month reported more upbeat sales than expected, despite an anticipated negative impact from east coast snow storms.
"We're looking for an overall decline of 0.6 percent and a decline, ex autos, of 0.4. I fear I'm too low because the anecdotal reports on the consumer are strong," said Michelle Girard, senior economist at RBS.
"The chain stores sales surprised people to the upside. Even into early March, the numbers looked good. Preliminary numbers on car sales look good too. It just looks like the consumer is continuing to build some momentum in here," said Girard.
Girard said car sales in early March were surprisingly good, based on a report from Edmunds.com on the first eight days of the month. Edmunds said incentives form Toyota and others drove sales in that period to a level equal to a seasonally adjusted annualized rate of 12.5 million units. That would be the highest level since September, 2008, with the exception of last August, when the "cash for clunkers" program boosted sales.
Pent-up demand will also be a factor that could push retail sales in coming months, as consumers replace everything from cars to clothing to electronics and perform home maintenance. Consumers are also dining out more. The restaurant category in retail sales was up 0.6 percent last month, the third month of improvement, she said.
"I think we're seeing it in all areas. Some of the housing related stuff might appear to lag, but the electronic stuff has done very well. Apparel and general merchandise has also done well," she said.
"People were saying the consumer is never coming back. We're not going back to crazy spending, but people can only save so long. They can not not spend for so long...I think as things turn around, there will be enough money for people to spend a little and save a little," she said.
Sentiment is expected to come in at 74, a slight improvement from last month's 73.6 but still a depressed level. "We've basically been moving sideways for the past four months," said Girard. Consumer confidence numbers reported last week were surprisingly weak, and economists say a major culprit is the painfully high level of unemployment.
Thursday's weekly jobless claims report provided little encouragement on that front. There were 462,000 initial claims filed for state unemployment benefits, slightly higher than expected.
Girard said it will be important to see the weekly jobless claims decline, and she does expect the monthly employment report to soon show job creation.
"We eventually will feel better when we see claims resume that downtrend that was in place in the fall. The (February) employment report was not as bad as feared," she said, adding other measures of employment including the Challenger report and ISM employment readings were also better than expected.
"I do think consumers are still sort of restrained in their optimism because the outright level of the unemployment rate is high, and they're tentative and concerned about how their own circumstances are going to be over the next year," she said.
Jeffrey Kleintop, chief market strategist at LPL Financial, says his firm's current conditions index is at the highest level of the past year. It now indicates an environment fostering growth in the economy and markets.
The index improved in the past week, in part because of a pickup in March retail sales. Other factors affecting the index were the narrowing of corporate credit spreads and a decline in the CBOE's VIX, or volatility index.
Kleintop said the index is reflecting the improvement in the economy and credit markets and bodes well for the stock market, at least in the first half of the year. " A lot of people were focused on the mixed data in February and were worried that the economy was ready for a pause, but it was mixed against he backdrop of all those storms," he said.
"I think if we didn't get those storms we'd have seen a much stronger economic picture. That would lead us to believe we'll see a rebound when we get the March data reports in April," he said.
Kleintop and other analysts believe stocks could run into trouble later in the year when it appears the Fed is getting closer to tightening. In the short term, he said stocks could meet resistance at 1150.
"We're about to enter a Fed week next week. Those weeks have been a little softer for the market as we look back to the last several meetings," he said. The Fed holds a one-day meeting on Tuesday.
Brian Dolan of Forex.com said the release of Thursday's retail sales report could make for a critical day for risk assets. "Coming from fx and looking at other markets, we're on the cusp of a break higher and if we can shrug off a disappointing retail sales number, it's all the more indication that sentiment is turning bullish in a renewed way," he said.
The dollar was slightly lower against the euro Thursday, at a level of $1.3681. It was barely higher against the yen.
"If we can get a weekly close above 1150 (on the S&P), green lights are on for gains in weeks ahead," he said. If the market fails to hold above the 1150 level, he said it could return to levels back around 1110 to 1115.
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