Monday, April 16, 2012

Earnings reports will serve as the key backdrop for market action this week, though market participants will also be keeping a close watch on the economy to look for signs that the first quarter’s growth momentum is not losing steam. The March jobs miss has the market wary of a slowdown along the lines of what transpired at the onset of Spring in the last two years. European fears are also coming back to the forefront, with yields on Spanish government bonds reaching their highest level since early December when the European Central Bank started pumping liquidity into the banking sector.

This morning’s better than expected March Retail Sales data belies the slowdown narrative, but is unlikely to put an end to the debate. We will likely have to wait till next month’s jobs report, but the Industrial Production and Jobless Claims data coming out Tuesday and Thursday respectively should provide some evidence either way. We also have a fair amount of housing related reports on deck this week as well, with Housing Starts on Tuesday and Existing Home Sales on Thursday. Last month’s housing data was less than inspiring, but the market will be looking for the ‘green shoots’ in this set of data.

The strong March Retail Sales reading is a net positive for the market today, with both the ‘headline’ and ‘core’ readings coming ahead of expectations. The strength in ‘core’ sales, which strips out auto and gasoline sales, is particularly encouraging given the recent spike in fuel prices. 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 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 positive March numbers improve the odds of creep up in first quarter GDP estimates, which at present is just a tad above 2%.

The first quarter earnings season gets into high gear this week, with a host of bellwether companies reporting results. Relative to expectations, the early reports have been quite decent, but we need to wait a bit longer to get a good flavor of corporate earnings. With almost 90 S&P 500 companies coming out with results this week, we should have a representative enough sample by this week’s end to be able to judge this earnings season.

Of this morning’s earnings reports, Citi’s ( C - Analyst Report ) appear to be better than expected, though getting a clear look into the banking giant’s quarterly report is a bit difficult given the multiple on-off items. We got fairly good results from Citi’s peers, J.P. Morgan ( JPM - Analyst Report ) and Wells Fargo ( WFC - Analyst Report ) , last week. But Citi’s enormous internal footprint makes it a play on the global banking industry. We also have weak results this morning from Mattel ( MAT - Analyst Report ) , the maker of Barbie and Hot Wheels.

Sheraz Mian
Director of Research