The Day Ahead: Retail Sales, $21 Billion 10s, Beige Book, Budget Politics

The risk trade is back on today and rates are creeping higher ahead of March Retail Sales data, a $21 billion 10-year Treasury note auction,  and the release of the Beige Book. President Obama is also anticipated to lay out how the federal budget deficits can be curtailed.

The ten-year Treasury firmed seven basis points to 3.50% in a broad flight-to-quality Tuesday. Benchmark 10s are currently -7/32 at 100-28 yielding 3.519%. The FNCL 4.5 is -3/32 at 101-09.  S&P 500 futures are 9 points higher at 1,317.25 and Dow futures are 70 points higher to 12,263. The gains, if sustained, would reverse roughly half the losses from Tuesday.

Asian markets rallied with shares in China and Hong Kong jumping 0.95% and 0.9%, respectively, and stocks in Japan climbing 0.66%. The ongoing session in Europe is also positive, led by a 1.26% rally in London's FTSE 100.

"Bond yields are climbing, however, particularly in Europe," noted Jennifer Lee at BMO Capital Markets. "Ten-year Greek yields hit a record high this morning of about 13% on reports that S&P believes that likelihood of a Greek debt restructuring was 'almost one in three' and that haircuts of between 50%-to-70% would be required."


Key Events Today:

8:30 - Retail Sales are anticipated to grow for the eighth consecutive month in March, but the overall pace is slower and a good portion of the increase is going straight into the gas tank. The consensus forecast expects headline sales to increase 0.5%, versus advances of 1% and 0.7% in the prior two months. Auto sales, which last increased 2.3% and played a big role in the recent increases, are expected to decline this month - retail sales excluding auto sales are expected to advance 0.7%.
"Retail sales have been strong in 2011, but are getting hammered by inflation," say economists at Bank of Tokyo-Mitsubishi, noting that average retail gas prices shot up 10.8% in March to $3.62 per gallon. They predict a 0.7% advance overall, but calculate that increase to be just 0.1% once the effect of higher gas prices is taken out of the equation.

"Automakers reported a decline in vehicle sales in March, as consumers cut back purchases of trucks in light of the higher gas prices, just as they did in 2008," BTMU added. 
Economists at TD Securities forecast that gasoline sales will post a 3% advance in the month, which they say will offset the drop in auto sales. 

"Core consumer spending is also expected to be higher, rising by 0.4% m/m, reflecting the positive tone in overall consumer spending," TD continued. "In the months ahead, given the continued recovery in overall economic conditions and sustained employment growth, we expect the advance in consumer spending to be sustained."

10:00 - Look for Business Inventories to grow 0.8% in February, following a 0.9% uptick in January. Inventories remain lean and their growth should help GDP in the first-quarter following impressive sales during the holiday period. The economics team at Deutsche Bank said their growth takes on added significance "because sizable inventory restocking is likely to account for nearly half of the rise in real GDP we are forecasting for Q1." 

Economists at Nomura, who predict a 0.7% rise, added: "The combination of price effects from higher energy prices and inventory accumulation probably pushed up the dollar amount of private inventories, while stockpiling activity by retailers could be moderate relative to wholesalers and manufacturers."

2:00 - The Federal Reserve's Beige Book is an anecdotal summary of regional economic performance published by the 12 districts of the central bank. It is published two weeks before the FOMC meetings, where monetary policy is determined. This report will be closely watched for talk of inflation and, of course, regional growth.

The last report said the economy "continued to expand at a modest to moderate pace in January and early February." Expectations are similar for this report.

"While March surveys of business sentiment remain upbeat, firms continue to feel the pressure of higher commodity prices and express anxiety over geopolitical uncertainty," said economists at Nomura. "The risks still seem balanced, and, in the words of NY Fed President Bill Dudley, the economy's recovery is 'still tenuous.'"

Treasury Auctions:
1:00 - 10-Year Notes ($21 billion)