Post Retail Sales investors should look to bonds

• Retail Sales are projected to surge. 

• Stimulus check, better weather, and return of Texas could mean 10% rise.

• Bonds remain nonplussed.

• Lower bond yields should keep the risk-on trade rolling. 

Retail Sales are projected to surge 

The markets are anticipating a massive rebound in Retail Sales this month but some economists predict that that number maybe even bigger than forecast.

US Retail Sales are due at 8:30 EST with market projections looking at a month over month rise of more than 6% versus last month's drop of -3%. There are several reasons why analysts expect a blow number. Stimulus checks, weather and pent-up demand. Flush with $1400 stimulus checks consumers are expected to have spent strongly this month, aided by gentle weather across most of the nation that prompted many to venture outside. Retail Sales are also expected to rise sharply in Texas where last month an unexpected freeze ground all economic activity to halt for at least a week.

Stimulus check, better weather, and return of Texas could mean 10% rise

Some analysts expected the confluence of positive factors to drive Retail Sales as much as 10% higher in the month of March or almost double the consensus view. Although such a string number would clearly be an outlier, it would also be a signal that US economic recovery is truly gaining momentum. It would also confirm the power of the stimulus policy which is clearly having a positive impact on where it matters most – the marginal consumer whose increase in buying power would have broad multiplier effects throughout the whole US economy.

Bonds remain nonplussed

The big question for the equity market should Retail Sales print as strongly as expected is how the bond market will react. Bonds have been muted over the past week with yields contained well above the 177 basis points highs set a few ago. Indeed ahead of the release, the yields on the benchmark 10 years were down to 161.5 basis points indicating little risk.

Lower bond yields should keep the risk-on trade rolling 

The decline in yields over the past weeks has been the major driver of gains in equities and as well as the decline in the dollar. USDJPY is well off its highs of 110 while EURUSD looks to be inching back towards the key 1.2000 big figure. Part of the serenity in the bond market has been due to better than expected Treasury auctions which have performed have soothed worries that buyers will not makes bids for US bonds given the massive US deficits. With US yields still vastly greater than anywhere else in the G-3 universe, bonds have performed far better than dire predictions of inflationists.

Whether this calm can persist even in spite of very strong US Retail Sales numbers remains to be seen. But if bond yields remain muted the fundamental backdrop should favor further gains in equities and further declines in the dollar as the risk-on trade rolls on.