How will consumption shape investments after the payrolls report?

How will consumption shape investments after the payrolls report? (Part 1 of 12)

How will consumption shape investments after the payrolls report?

Consumption

Last week’s releases focused mainly on industrials and manufacturing, but this week, the focus shifts to consumer-related economic indicators. Perhaps the most relevant release for fixed income investors this week will be the full transcript of the FOMC minutes for the Fed’s meeting held on March 18–19. Apart from this important release, consumption indicators will be the dominant theme this week, with discretionary spending trends, consumer debt, more jobs releases, retail sales, and consumer sentiment. As consumption expenditure makes up over two-thirds of the economy, this week will test the underlying strength of the recovery—especially after March’s somewhat positive non-farm payrolls addition of 192,000.

Part 1Enlarge Graph

The week will start with Gallup’s self-declared discretionary consumer spending report for March on Monday, April 7. Consumer credit numbers for February will also be released the same day by the U.S. Federal Reserve.

Tuesday, April 8, will see the issue of the weekly ICSC-Goldman Sachs and Johnson Redbook retail sales releases. The Job Openings & Labor Turnover Survey (or JOLTS) and the NFIB Small Business Optimism Index will also be released the same day.

The Mortgage Bankers Association Purchase Applications weekly report will release on Wednesday, April 9. Wednesday will also see the release of the FOMC minutes mentioned earlier, as well as wholesale trade data for March.

On Thursday, April 10, weekly reports for initial jobless claims and the Bloomberg Consumer Comfort Index are expected to release. The Treasury’s budget, import-export prices, and chain store sales will also release the same day.

Producers Price Index figures for March are expected to release on Friday, April 11. This report will have important implications on inflationary trends in the economy. Inflation is closely watched by policy-makers, as it could be one of the most important catalysts for increasing the base rate. Friday will also see the release of the Thompson Reuters/University of Michigan Surveys of Consumers, which forms part of the Conference Board’s Leading Indicators Index (or LEI), signaling economic expansion or contraction.

Investor alert

The surplus or deficit in the Treasury’s budget is likely to have an impact on future issues of government Treasury securities. Other factors remaining constant, the higher the deficit, the higher the issue of government securities, and vice versa. The supply will impact the prices of fixed income ETFs like the Vanguard Total Bond Market ETF (BND) and the Core Total U.S. Bond Market ETF (AGG).

This week’s releases are also likely to impact companies in the consumer discretionary space, with increases in consumption translating to increases in sector revenues and vice versa. ETFs investing in the sector include the Market Vectors Retail ETF (RTH), which tracks the Market Vectors US Listed Retail 25 Index. The index is designed to track the overall performance of the 25 largest publicly listed retailers in the U.S. The top holdings in the ETF include the S&P 500 Index (VOO) components Amazon.com (AMZN), at 8.1%, and Wal-Mart Stores Inc. (WMT), at 8.04%.

For a preview for the first indicator due to release this week, Gallup’s daily discretionary consumer spending report, read on to Part 2 of this series.

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