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Macro View

Favorable data on consumer spending and reassuring noise from Europe will likely put stocks in a positive mood today. We got better-than-expected Retail Sales data this morning, which provides reassuring evidence of resilience in consumer spending. Lingering positivity from last night's blowout results from Google (GOOG) will likely rub off on the technology sector, offsetting worries about banks highlighted by J.P. Morgan's (JPM - Analyst Report) results.

But let's talk about Europe first, as they seem to be making all the right noises about addressing the common currency's problems. The finance officials of the G-20 countries meeting in Paris are discussing the outlines of a credible-looking plan. The plan includes requiring banks to raise additional capital, deeper 'haircuts' for holders of Greek bonds (aka orderly Greek default) and increased lending capacity for the IMF and the Euro-zone rescue fund.

The plan may get finalized in the coming days to be considered by the G-20 summit meeting on November 3. A plan along these lines would have the potential to tackle the European problem in a durable and comprehensive fashion. It is perhaps premature to be optimistic at this stage, but at least they are discussing the appropriate measures to address the problem.

On the domestic front, we got a favorable reading on consumer spending. September Retail Sales increased a better-than-expected 1.1%, after a 0.3% increase in August. The August growth rate is a positive revision from the originally reported 'unchanged' reading. Since the headline monthly retail sales number includes the sale of automobiles, gasoline and building materials, which fluctuate from month to month, excluding these items gives us a better measure of the underlying trend in retail sales. The so-called 'core' retail sales also increased a better-than-expected 0.6%, after a 0.4% increase in August. This is the best retail sales reading since March this year.

This report is admittedly not a perfect proxy for consumer spending since it only includes sales of 'goods' at retail establishments and leaves out the much bigger consumer outlays on services. But it nevertheless provides valuable clues to trends in consumer spending, which is the backbone of the U.S. economy. This shows that the U.S. economy ended the third quarter on a fairly positive note, particularly on the consumer spending front. I would expect this report to give another nudge to the recent emerging trend to positive revisions to third quarter GDP growth estimates.

On the earnings front, we have Google's blowout results from after the close on Thursday, with the search giant handily beating expectations. J.B. Hunt Transport (JBHT - Analyst Report), the trucking operator, came out with a modest EPS beat on in-line revenue numbers after-market on Thursday. This morning, we have in-line earnings from Mattel (MAT - Analyst Report), the toy maker, on modestly better-than-expected top-line results.

It is still early going on the earnings front. The next two weeks should give us a very good idea of where we stand with the outlook for corporate profitability front. If only the Europeans can come out with something along the lines of what is being contemplated in the G-20 meeting, we will have the building blocks of a solid market rally.

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