How the retail sales index impacts Wal-Mart and other retailers

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Retail sales index

The retail same-store sales releases this week are some of the major indicators to assess consumer spending patterns. The reports are not only closely watched by analysts in the stock and bond markets, but also by many retailers such as Wal-Mart (WMT), Target Corporation (TGT), and Best Buy (BBY), which rely on the report to gauge consumers’ feelings about the economy. Growth in the economy usually spurs consumer spending. However, over the past few months, the markets have reacted contrarily, with downward trends in consumer spending—mainly due to persistently low employment levels and declines in overall consumer sentiment. However, unemployment levels have started easing since the beginning of the year— currently at 6.7%. They’re still below the Fed’s target of 6.5% before it begins raising interest rates.

ICSC vs. Redbook

What are the ICSC and Redbook indexes?

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The International Council of Shopping Centers (or ICSC) Index is prepared by UBS, a global financial services firm. The ICSC-Goldman Index provides a weekly snapshot of U.S. retail chain store sales. The index measures comparable-store sales at major retail chains, excluding restaurants and vehicle dealerships. The ICSC-Goldman Index accounts for roughly 10% of total retail sales. The ICSC and the Redbook indexes are very similar in their construction. Both indexes use sales-weighted geometric average growth rates to preserve long-term consistency and are statistically benchmarked to the broad-based retail industry’s same-store sales on a monthly basis. Both indexes contact retailers to assess weekly sales. However, the Redbook Index is a less consistent indicator of retail sales than the weekly ICSC-Goldman Index, as it concerns a smaller sample size than the ICSC-Goldman Index.

What did the latest reading indicate?

Volatility continued in the retail sales index released this week, as the consumer shopping bracket remained low. Harsh weather effects have rolled over into March, which has been impacting consumer spending for the past few months. Same-store sales reported by the ICSC-Goldman Index rose barely 0.7% versus the Redbook Sales Index, which grew 2.8% in the week of March 15, 2014. Share prices for Wal-Mart (WMT) and Target Corporation (TGT) were down on the day, in line with the decline in the retail sales index announcement—by 0.2% and 2.0%, respectively.

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Weekly data is a very powerful indicator of short-term volatility in retail sales. For analysts in the fixed income market, weekly reports are an early indication of where the economy is headed. A substantial portion of retail sales is driven by consumer spending, which constitutes more than two-thirds of the U.S. gross domestic product. So changes in consumer spending have a major impact on the economy’s overall growth. An increase in the index means the economy is growing alongside an increase in consumer spending. The situation may lead to a rise in inflation as demand increases. Plus, the improved economy allows the Fed to increase interest rates, which causes bond prices to fall.

How did markets react to the ICSC and Redbook index releases?

For the bond market (BND), the focus is on whether economic growth will lead to inflation. When economic growth slows, investors move into bond markets. However, when the economy accelerates, investors move from bonds into the equity market (SPY). You can gauge the economic impact on the bond market by tracking ETFs such as the iShares Barclays 20+ Year Treasury Bond (TLT) and the Vanguard Total Bond Market ETF (BND).

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