The 'Moment Of Truth' Is Coming For The US Economy, And The First Big Test Is This Week

The thinking is this: Markets have surged all year like there's not a care in the world. On the other hand, the economy has already been buffeted by one major headwind (the end of the payroll tax holiday) and it could be hit by another (the upcoming sequestration spending cuts. As such, we're about to know whether the economy can really justify the market rally, or whether risky assets will have to come floating back down to earth.

BofA/ML strategist David Woo described this to us as a "moment of truth" for the economy, and anticipated the fight over the sequester (which takes place over the coming weeks) will be where it all happens.

Other folks have called this a "tipping point" for the market, but it's basically the same idea.

In a note to clients, Citi's Steven Englander says that a big test is coming up this week, on Wednesday in fact. That's when we get January retail sales, which he calls 'The Most Important Datapoint So Far This Year.'

The big question for the US economy is how much of a headwind the January 1 tax hike has become for US activity. Janaury retail sales would by far be affected more directly than January payrolls or ISMs, so retail sales will be the first really hard data on the impact of the tax hike. Expectations are relatively muted. The consensus is for headline and ex-autos at +0.1% m/m (Citi economists expect +0.2% and +0.3%, on the view that momentum will persist. Core retail sales are expected to growth 0.3% m/m by the consensus and 0.4% by Citi economists.

The moment of truth is coming. And it starts this Wednesday.

SEE ALSO: David Woo on the moment of truth for the US economy >