Reassuring data out of Europe and hopes of favorable tax law changes in Japan have helped lift pre-open sentiment, offsetting the modestly weaker than expected July Retail Sales report on the home front. The glimmer of hope on the European front, if confirmed by data in the coming days, will likely provide a material boost to investor confidence.
Given Europe's status as a drag on the global economy over the last two years, the emerging signs of a recovery in that region are very encouraging. Tuesday’s industrial output numbers indicate that the rebound in Germany is strong enough to have lifted the entire region out of recession in Q2. We will get the Q2 GDP numbers on Wednesday, but consensus expectations are for positive growth. If we do get a positive GDP growth reading tomorrow, then it will be first expansionary print since the third quarter of 2011.
We should keep in mind however that the region’s recovery is very lop-sided, with strong growth in Germany offset by continued weakness in France and a number of other key markets. What this means is that the expected end to the Euro-zone recession should not be read as the start of a material growth spurt in that region. But even if the region wouldn't provide a lift to the global growth outlook, an end to the region's recession will nevertheless provide a lift investor sentiment.
On the home front, the July Retail Sales data presented a mixed picture of the all-important consumer economy. The ‘headline’ number came in a bit weaker than expected, the growth rate outside of autos was a bit stronger. Importantly, the growth rate for June was revised higher, likely indicating that the Q2 GDP growth rate will get revised higher. Better international trade data that came out after the Q2 GDP report had already confirmed that the GDP growth rate would get revised higher. Today’s revision to June retail sales numbers almost guarantees that the second read on Q2 GDP will likely come in the +2.2% to +2.5% vicinity, up from the originally released +1.7% level.
The Retail sector has done reasonably well in the Q2 earnings season, even though roughly half of the sector’s results are still awaited. Total earnings for the 54% of Retail companies that have reported already are up +11.6% on +4.9% higher revenues. This is a better growth pace, particularly on the revenue front, than what we saw from the same group of companies in Q1. We will get a better read on Retail sector profitability after Thursday’s earnings report from Wal-Mart (WMT - Analyst Report), Nordstrom Inc. (JWN - Analyst Report), and Kohl’s (KSS - Analyst Report). But this is nevertheless reassuring performance from the sector, particularly given the headwinds facing the sector.