Investors bid up cyclical stocks in the past week, but the economy will have to prove that the reflation trade — a bet on economic growth — is the way to go as concerns about Covid linger.

Markets are deep in the dog days of August. That means the Federal Reserve and key data, particularly retail sales could provide some direction for stocks in the week ahead.

Major stock indices were mixed in the past week, with the Dow and the S&P 500 hitting new highs and the Nasdaq flattish. But there was a clear move higher in cyclical sectors that gain when the economy is expected to improve.

The moves also paralleled a jump in bond yields. The 10-year Treasury yield popped to 1.36% Thursday, but slipped as low as 1.29% on Friday amid a surprising drop in consumer sentiment. The metric fell to its lowest level since 2011, as consumers grew worried about the coronavirus and its potential impact on the economy.

The reflation trade

Materials were up 2.6% for the week in Friday trading, and industrials were up 1.3%. Financials, which do best when rates are higher, were up 1.8% for the week. Tech, which underperforms when rates rise, was down just slightly on the week.

“I do think there will be a resurgence of the reflation trade. I do think you can buy some of the cheap cyclicals,” said Adam Parker, founder of Trivariate Research. Parker said he likes materials, metals, mining and some energy.

Treasury yields had been moving higher after stronger jobs and inflation data. But they were kicked into a higher gear by comments from a parade of Fed speakers, who all shared their views on what it would take for the central bank to wind down its bond buying program.

The Federal Reserve has been purchasing $120 billion of Treasury bonds and mortgage-backed securities to prop up the economy and provide market liquidity during the worst days of the Covid pandemic.

On Wednesday, the Fed will release the minutes of its last meeting. While that is viewed as old news, the release will be highly scrutinized for more details on the “tapering” process. The Fed’s move to slow and ultimately end its bond buying is important since it is the first major step away from easy policy and a step toward interest rate hikes.

The views of central bank presidents have been varied. Dallas Fed President Rob Kaplan thinks the Fed should start paring back purchases in October, while to Chicago Fed President Charles Evans wants a few more months of jobs data.

“I keep thinking it’s the Fed’s attempt at clarity, by offering a variety of options as to when they will start the tapering process,” said Sam Stovall, chief investment strategist at CFRA. “In a sense, it’s trial balloons to keep the conversation going so the prospect of tapering is in the forefront of investors, so when it does occur it will not come as even the slightest shock.”

There aren’t many speaking opportunities for central bank officials in the week ahead. Fed Chairman Jerome Powell will hold an event for educators and students on the central bank and education Tuesday. Fed officials will be at their annual symposium in Jackson Hole, Wyo. from Aug. 26 through Aug. 28, and tapering the $120 billion a month bond buying program is expected to be a big topic on their agenda.

Focus on consumers

A flurry of retail news in the week ahead will put market focus on the consumer, the driver of 70% of the U.S. economy. The Census Bureau will release July’s monthly retail sales report Tuesday morning. That same day, retail heavyweights Walmart and Home Depot report earnings.

Macy’s, Target, TJX and Lowe’s are also among retailers reporting in the coming week. Investors will be watching for updates on what retailers are facing in the job market and how they are handling rising prices. They will also be listening for any update on consumer behavior with the spread of the delta variant of Covid.

“You’ll get a sense of just how strong consumers have been,” said Michael Schumacher, director of rates strategy at Wells Fargo. “One thing we took out of the CPI [consumer price index] report was the inflation on some services was lower than it was in the prior months.”

CPI was up 5.4% year-over-year in July, and producer prices were also hot, up a sizzling 7.8% in July over the past 12 months.

Trivariate’s Parker said the market will focus on the data, including retail sales, industrial production on Tuesday, and jobless claims Thursday. There are also the Fed’s Empire manufacturing data Monday and the Philadelphia Fed survey on Thursday. If the data continues to look strong, it supports the reflation trade.

“I do think that trade will work again for part of the fall,” Parker said.

Week ahead calendar

Monday

Earnings: Tencent Music, Roblox

8:30 a.m. Empire state manufacturing

4:00 p.m. Treasury TIC data

Tuesday

Earnings: Walmart, Home Depot, Agilent, La-Z-Boy, BHP Group

8:30 a.m. Retail sales

8:30 a.m. Business leaders survey

9:15 a.m. Industrial production

10:00 a.m. Business inventories

10:00 a.m. NAHB home builders survey

1:30 p.m. Fed Chairman Jerome Powell town hall with educators and students on the Fed and economic education

Wednesday

Earnings: Target, NVIDIA, Lowe’s, Cisco Systems, Tencent, TJX, Bath and Body Works, Analog Devices

8:30 a.m. Housing starts

2:00 p.m. Fed meeting minutes

Thursday

Earnings: Applied Materials, Macy’s, BJ’s Wholesale, Petco, Estee Lauder, Kohl’s, Ross Stores, Adtalem

8:30 a.m. Jobless claims

8:30 a.m. Philadelphia Fed manufacturing

10:00 a.m. QSS

Friday

Earnings: Deere, Foot Locker, Buckle