A rally in recovery stocks could depend on consumers and the Fed in the coming week

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Traders works on the New York Stock Exchange (NYSE) on August 4th, 2021.

Andrew Kelly | Reuters

Investors topped up cyclical stocks over the past week, but the economy needs to prove that reflation trading – a bet on economic growth – is the way to go as concerns about Covid remain.

Markets are deep in the dog days in August. That means the Federal Reserve and key data, especially retail sales, could provide a direction for stocks in the coming week.

The major stock indices were mixed for the past week, with the Dow and S&P making new highs and the Nasdaq flat. However, there has been a clear uptrend in cyclical sectors, which rise when the economy is expected to recover.

The moves were also accompanied by an increase in bond yields. The 10-year government bond yield rose to 1.36% on Thursday but fell to 1.29% on Friday amid a surprising drop in consumer sentiment. The metric fell to its lowest level since 2011 as consumers worried about the coronavirus and its potential impact on the economy.

The reflation trade

Commodities rose 2.7% in Friday trading and industrials rose 1.4%. Financials, which do best on higher rates, rose 1.9% for the week. Tech, which underperforms as interest rates rise, stayed flat, up slightly less than 0.1%.

“I think the reflation trade will revive. I think you can buy some of the cheap cyclical stocks,” said Adam Parker, founder of Trivariate Research. Parker said he likes materials, metals, mining, and some energy.

Government bond yields had risen after stronger employment and inflation data. But they were kicked into higher gear by comments from a parade of Fed speakers, all of whom shared their views on what it takes for the central bank to end its bond-buying program.

The Federal Reserve bought $ 120 billion in government bonds and mortgage-backed securities during the worst days of the Covid pandemic to prop up the economy and provide market liquidity.

The Fed will publish the minutes of its last meeting on Wednesday. While this is considered old news, the release is being scrutinized for more details on the “tapering” process. The Fed’s move to slow and eventually stop its bond purchases is important as it is the first big step away from loose policy and a move towards rate hikes.

Central bank governors had different views. Dallas Fed President Rob Kaplan believes the Fed should start cutting purchases in October, while Chicago Fed President Charles Evans wants a few more months of job data.

“I always think it’s the Fed’s attempt to provide clarity by offering a variety of options as to when to start the tapering process,” said Sam Stovall, CFRA’s chief investment strategist. “In a way, they’re trial balloons to keep the conversation going so that the prospect of investing reductions is in the foreground.

There aren’t many speaking opportunities for central bank officials in the coming week. Fed chairman Jerome Powell will host an event for educators and students on the central bank and education on Tuesday. Fed officials will attend their annual symposium in Jackson Hole, Wyoming, August 26-28, and the $ 120 billion monthly bond purchase program reduction is expected to be a big topic on their agenda .

Focus on consumers

A flurry of retail news over the coming week will shift the market’s focus to the consumer, the engine of 70% of the US economy. The Census Bureau will release its monthly retail sales report for July Tuesday morning, and the Dow Jones is forecasting a 0.2% decline. On the same day, retail heavyweights Walmart and Home Depot report profits.

Macy’s, Target, TJX, and Lowe’s are also among the retailers reporting for the coming week. Investors will pay attention to current developments that retailers are facing in the labor market and how they are dealing with rising prices. They will also keep an eye out for updated information on consumer behavior with the spread of the Delta variant of Covid.

“You will get a sense of how strong the consumers were,” said Michael Schumacher, director of rates strategy at Wells Fargo. “We have one thing from the CPI [consumer price index] According to reports, inflation on some services was lower than in previous months. “

CPI rose 5.4% yoy in July, and producer prices were hot too, rising a sizzling 7.8% in July over the past 12 months.

Trivariate’s Parker said the market will focus on the data, including retail sales and industrial production on Tuesday and jobless claims on Thursday. There’s also Monday’s Fed Empire production data and Thursday’s Philadelphia Fed poll. If the data continues to look strong, it will aid reflation trading.

“I think trading will be back up for part of the fall,” said Parker.

Calendar for the week in advance

Monday

Merits: Tencent music, Roblox

8:30 a.m. Empire State Manufacturing

4:00 p.m. Treasury TIC data

Tuesday

Merits: Walmart, Home Depot, Agilent, La-Z-Boy, BHP Group

8:30 a.m. retail sale

8:30 a.m. Survey among executives

9:15 am Industrial production

10:00 am business inventories

10:00 am NAHB client survey

1:30 p.m. Fed Chairman Jerome Powell City Hall with educators and students about the Fed and economic education

3:45 p.m. Minneapolis Fed President Neel Kashkari

Wednesday

Merits: Target, Nvidia, Lowe’s, Cisco Systems, Tencent, TJX, Bath and Body Works, Analog Devices

8:30 a.m. start of the apartment

14:00 Fed meeting minutes

Thursday

Merits: Applied Materials, Macy’s, BJ’s Wholesale, Petco, Estee Lauder, Kohl’s, Ross Stores, Adtalem

8:30 a.m. unemployment claims

8:30 am Philadelphia Fed manufacturing

10:00 a.m. QSS

Friday

Merits: Deere, Foot Locker, Buckle