Wednesday, August 13, 2014
Stocks are indicated to open in the positive, bucking the overwhelmingly negative tone of this morning's data - ranging from the soft U.S. retail sales report to a weak read from the Japanese economy and the surprising Macy's( M ) miss.
The contraction in the Japanese economy in Q2 didn't come as a surprise - the market expected it as a direct payback for the consumption-tax hike that took effect at the start of April. In fact, it came in modestly lower than expected, but that was primarily due to inventories. That said, the sharp pullback in the 3rd largest economy of the world - down -1.7% on a quarter-over-quarter basis and -6.8% on a year-over-year basis - is a reminder of the fragility of the global economic recovery.
Japan's economy is expected to bounce back in Q3 and beyond, but nobody can say something comparable about the Chinese and Euro-Zone economies, with recent data showing steady slides in the growth momentum of these two regions. In fact, it's hard to say much positive about any economic region beyond the U.S. and to some extent the U.K.
On economic data, the July Retail Sales read missed estimates on the 'headline' as well as the report's internals, with no major revisions to the prior month's numbers. The monthly Retail Sales report isn't a perfect proxy for the GDP report's consumer spending component as it only tracks nominal (or non-inflation-adjusted) merchandise sales at the retail and food service establishments, but it nevertheless gives us good sense of what is happening in this key part of the economy. What this report shows is that the bounce-back that we saw in Q2 consumer spending may not be carrying through to the current period.
Consumer spending has been OK, neither good nor bad. But the hopes has been that the recent signs of improvement in the labor market would give households enough buying power to start spending. We didn't see that in this report.
The Retail sector is in the spotlight on the earnings front as well, with a big part of the remaining Q2 earnings reports belonging to the sector. It hasn't been a good earnings season for the sector thus far, with most companies coming short of already-low estimates. This morning's weak report from Macy's, which has been a stand-out performer lately, will cause expectations for the sector to come down even further. Unlike Wal-Mart ( WMT ), which reports before the open on Thursday and isn't expected to show much strength, Macy's was expected to show better results. But it didn't.
Beyond Retail, we saw a weak report from Deere & Company ( DE ) this morning, with the farm-equipment giant beating estimates but lowering outlook. Including these reports, the scorecard now shows Q2 results from 459 S&P 500 companies, with total earnings up +8.8% on +4.5% higher revenues.
Director of Research
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