Tuesday, February 14, 2012
Moody’s downgrade appears to have had little impact on Italy’s borrowing costs as the country held a successful bond auction today where yields fell. Spain also suffered a downgrade from Moody’s and experienced a similar rate contraction. This appears to be becoming a trend now, with the bond market paying little attention to sovereign ratings downgrades. We saw that with the Standard & Poor’s downgrade of the U.S. rating last summer and a number of European credits a month back. The same trend seems to be playing out with Moody’s downgrades now. The recent non-effectiveness of sovereign credit ratings aside, there is no denying the fact that sovereign balance sheets are out of shape, particularly in Europe.
Europe aside, the major news of the day pertains to the mixed Retail Sales numbers for January on the home front, with the ‘headline’ number coming weaker than expected, but the ‘core’ number better than expected. Retail Sales came in weaker than expected on the headline basis, up 0.4% compared to expectations of 0.7% gains. This compares to the ‘unchanged’ December reading, which was revised downwards from the originally reported 0.1% gain. 'Core' Retail Sales, which excludes automobile and gasoline sales data, came in better than expected, up 0.7% compared to expectations of a 0.6% gain. The ‘core’ reading for December was also revised downwards.
The weak ‘headline’ Retail Sales reading runs counter to positive reports of auto sales and other indicators from the broader economy. Measures of consumer confidence have been moving up and the labor market has been steadily moving in the right direction. 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. The downward revision to the December ‘core’ Retail Sales numbers could be pointing towards a downward adjustment to the fourth quarter GDP numbers coming out later this month.
On the earnings front, we got weaker than expected results from Avon Products (AVP - Analyst Report), with a number of unusual items in the company’s report. The company is currently in the process of hiring a CEO to replace Andrea Jung, who will remain the company’s chairman. Goodyear Tire & Rubber (GT - Analyst Report) missed both EPS and revenue expectations, though results were a significant improvement from the year-earlier quarter.
Director of Research