Ahead of Wall Street - November 15, 2011

Tuesday, November 15, 2011

With yields on Italian government bonds moving back up towards the scary 7% level following Mario Monti's troubles in gaining parliamentary traction with technocratic government, there will be escaping all too familiar European headlines. Italy fears aside, we also disconcerting economic growth news out of Europe this morning.

But unlike the constant barrage of negative news out of Europe, the U.S. economic scene is a lot more reassuring. We got a better than expected Retail Sales report this morning and the PPI report is pointing towards fairly benign inflationary pressures. We also have a couple of reassuring earnings reports bellwether retail companies this morning.

Of today's domestic economic releases, the most reassuring is the continued resilience on the consumer spending front. We got a better than expected 0.5% increase in October Retail Sales, which is a solid performance following the impressive September gains. 'Core' Retail Sales, which excludes automobile and gasoline sales data, also came in better than expected.

The Retail Sales report is admittedly not a perfect proxy for consumer spending since it only includes 'goods' sales at retail establishments and leaves out the much bigger consumer outlays on 'services'. But it nevertheless provides valuable clues to trend in consumer spending, which is the backbone of the U.S. economy. Today's Retail Sales report shows that the positive consumer spending trend of the third quarter has carried into the current quarter.

In other economic releases, the bigger than expected drop in the PPI reading shows that pricing pressures at the wholesale level remain tame. On a 'headline' basis, PPI declined 0.3% in October, after increasing 0.8% in September. The 'core' PPI reading, which strips out the food and energy components, remained unchanged from the prior month's level.

Inflation readings, like today's PPI and Wednesday's CPI, have been elevated lately and account for part of the disagreement within the FOMC about the conduct of monetary policy. But today's favorable reading, if sustained in the CPI report, will remove this key argument from the hawks' arsenal. In this context, this report is favorable to further quantitative easing action from the Fed.

On the earnings front, Home Depot (HD) came out with a positive surprise, raised guidance, and announced a dividend hike. The home improvement retailer is benefiting from market share gains at the expense of smaller rival, Lowe's (LOW). We also have better than expected same-store sales numbers from Wal-Mart (WMT), reversing a string of negative comps in recent quarters. However, the retail giant's earnings matched expectations.

Sheraz Mian

Director of Research

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