While trade talks between the US and China have slid squarely back into the frame this past week, retail sales and housing data provided investors with some fuel for direction, as well as further bits of evidence they can use to gauge monetary policy.

The financial markets have remained glued to changes in the economic landscape for any signs of higher inflation as interest rates backup and the US dollar rises, while yield curve flattening has many strategists talking about the potential for a near-term recession.

While the equity market generally embraces stronger US economic data, including healthy retail sales, upbeat consumer confidence, an improved labor market and modest signs of inflation, it frets a potential further flattening of the yield curve (FLAT), which could trigger a correction.

A more positive US economy could also spur the Federal Reserve to hike rates at a faster clip than what the market has currently priced-in.

Retail sales

Although the April retail sales report didn’t suggest any surge in the latest month, upward revisions to the previous month helped draw a rosier picture of consumer spending, and the market generally considered the data encouraging.

Analysts at Nasdaq pointed out that larger after-tax paychecks “helped compensate for rising fuel costs, indicating that consumer demand was off to a solid start for the quarter.” Nine of the thirteen major retail categories showed advances in April, with apparel stores leading the way. Furniture merchants, building material outlets and internet retailers also came in “strong.”

Some US retailers’ quarterly earnings reports seemed to agree with the data, while a delayed spring hampered some companies’ sales, and the fight between traditional brick and mortar shops and internet-based firms waged on.

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The 160-year-old retailer’s chair and CEO Jeff Gennette attributed the store’s success, in part, to its e-commerce and mobile strategy. The retail chain achieved double-digit growth in its digital business, with traffic through its website and Macy’s app playing a large role in helping its top and bottom lines.

Macy’s stock rose more than 12% after its earnings news Wednesday, and remained up over 0.4% ahead of the weekend.

While Walmart’s (WMT) earnings were also upbeat in its efforts to keep internet titans such as Amazon (AMZN) from stealing market share, JC Penney’s (JCP) department stores weren’t as successful.

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It appears online retailers and cooler-than-normal weather patterns took a bite out of the Texas-based company in the first quarter. Its sales were also down after the firm shut more than 140 of its stores last year. JC Penney’s also been incurring higher costs, driven in part by its online operations. 

The firm’s stock plunged after the news, and has taken a nosedive of more than 50% since late last July.

Overall, while internet-based companies continue to see strength, traditional stores appear to be putting up a good fight.

A recent fall in the value of the Amplify Online Retail ETF (IBUY), which focuses on online shopping firms, against the SPDR S&P Retail ETF (XRT), which mainly invests in traditional brick and mortar shops, may indicate a resurgence of the in-store shopping experience.

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While the traditional retail industry has been disrupted by internet-based competition, online firms have also been threatened other veteran players, such as telecommunications and media companies, for several years, spurring a rash of convergence plays and consolidation.

Housing

Meanwhile, slower housing construction and rising interest rates have recently made a dent in the credit profiles of some homebuilders and home improvement retailers.

Neil Azous at Rareview Macro recently noted that given the degree of the short positioning in US fixed income, it shouldn’t come as a surprise that the professional community’s consensus view is that the yield on the 10-year US Treasury note has “formally adjusted to a new higher range.”

Rising interest rates typically bode poorly for the housing market.

Some analysts think an increase in mortgage rates and a revision to the tax treatment for mortgage interest deductions could also place negative pressure on affordability and weaken demand.

Although fundamentals underpinning the housing market may be sound, it is against this landscape that the real estate sector has been dragging-down the performance of the broader S&P 500 (SPX).

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Analysts generally say housing data, poor weather and erratic consumer spending were likely linked to Home Depot’s (HD) miss on the sales front in the first quarter, while others think the Street’s target may have simply been too aggressive.

Home Depot topped analysts’ estimates with higher-than-expected earnings for the first quarter of 2018, but disappointed those who were looking for bigger net sales.

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US-based homebuilder D.R. Horton’s (DHI) stock has also fallen amid the recent rise in interest rates, while lower-than-expected housing starts this past week also weighed on the company.

The value of the homebuilder’s shares has been falling against the iShares US Home Construction ETF (ITB) since mid-December last year, and has plunged around 20% from its five-year high set in early January.

Look ahead

Looking at the week ahead, we see manufacturing data come from the Richmond and Kansas City Feds, with Durable Goods Orders coming in at the end of the week. Another slew of Fed speakers also line the calendar, with Philadelphia president Patrick Harker and Minneapolis Fed chief Neel Kashkari getting the week started. The FOMC will also release the minutes from its May meeting on Wednesday.