Monday, July 16, 2012

This morning’s weaker than expected Retail Sales data provides further evidence of negative momentum in the economy. The reading will likely keep the market’s hopes of additional Fed support alive and will further enhance the spotlight on Bernanke’s Senate testimony on Tuesday. Partly offsetting the negative Retail Sales report is the modestly positive Empire State manufacturing survey for July and the better than expected earnings report from Citigroup (C) this morning.

The June Retails Sales report showed the third consecutive monthly decline in this key measure of consumer spending. The measure was weaker still after excluding automobile and gasoline sales, which can cause unusual swings in this non inflation adjusted measure of consumer spending. The Retail Sales report is admittedly not a perfect proxy for ‘real’ consumer spending since this non-inflation adjusted measure only includes ‘goods’ sales at retail establishments and leaves out the much larger consumer outlays on ‘services’.

The anemic jobs growth of the last few months is likely a contributor to this soft spending pattern, but the hope was the recent drop in gasoline prices (which showed up in the ‘headline’ decline in today’s data) will help spur spending elsewhere. Many expect the Fed to play its part by announcing additional support in next month’s FOMC meeting and will be looking for signs of that in Bernanke’s Senate testimony tomorrow.

We are also getting into the thick of the second quarter earnings season, with almost a fifth of the S&P 500 companies reporting results this week. The positive earnings report from Citigroup this morning and J.P. Morgan (JPM) on Friday aside, the early reports have set a downbeat tone for this earnings season. Total earnings for the 32 companies that have reported results already are flat from the year-earlier period, with a median surprise of a very weak 1.1%. These same companies did much better in the first quarter, with earnings growth of 4.9% and a median surprise of 3.6%. But given the small number of reports thus far, it’s perhaps a bit too early to write-off this earnings season at this stage. With reports from almost a quarter of all S&P 500 companies by the end of this week, we will have a good enough sample size to judge the quality of the second quarter earnings season.

Sheraz Mian
Director of Research

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