Ahead of Wall Street - May 15, 2012

Tuesday, May 15, 20112

The overall tone of today’s news flow, both on the home front as well as from Europe, is decidedly favorable. This should help stocks reverse the persistent downtrend of recent sessions, even if it lacks in staying power.

Today’s positive-looking data out of Europe should help offset, howsoever temporarily, the constant drumbeat of negative Greece-inspired headlines. It is not often that one would describe ‘zero GDP growth’ as positive news, but that’s exactly what we have in today’s first quarter GDP report for the Euro-zone. The report defied expectations of a back-to-back second quarter of negative growth to come in at ‘unchanged’ or ‘0%’ growth. Italy and Spain are firmly in a recession, but it was the strength in the German economy that pulled the Euro-zone above the negative territory.

Economic data on the home front is also reassuring, with an in-line April Retail Sales reading, a benign looking inflation report, and a better than expected Empire State regional manufacturing survey. Growth in Retail Sales decelerated from the preceding month’s strong pace, mostly due to the earlier Easter holiday this year, but that was expected. Momentum on the Retail Sales front is important as it serves as proxy for consumer spending, which accounted for the bulk of growth in the first quarter GDP. Desipite the lower growth pace, today's Retail Sales report is consistent with consumer spending growth along the lines of what we saw in the first quarter GDP.

The April Retail Sales reading is a net positive for the market today, with both the ‘headline’ and ‘core’ readings matching expectations following the exceptionally strong reading in March. Retail Sales were up 0.1% in April on a ‘headline’ basis vs. up 0.7% in March. The ‘core’ reading, which strips out auto and gasoline sales, was also up 0.1% in April vs. up 0.8% in March. 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 larger consumer outlays on 'services'. But it nevertheless provides valuable clues to trends in consumer spending, which is the backbone of the U.S. economy.

The Consumer Price Index (CPI) for April came broadly in-line with market expectations, ‘unchanged’ on the ‘headline’ after March’s 0.3% increase. ‘Core’ CPI, which strips out food and energy, also matched expectations, was up 0.2% after March’s increase of the same amount. The year-over-year readings were broadly in-line with expectations as well. The not-so-hot ‘core’ reading will keep hopes of further Fed support alive should economic growth start disappointing.

On the earnings front, Home Depot (HD - Analyst Report) matched earnings expectations, but missed the top-line, while Dick’s Sporting Goods (DKS - Analyst Report) came out with a solid positive beat. Groupon (GRPN - Snapshot Report) handily beat earnings expectations after the close on Monday, though its top-line came short of expectations.

This is a big news day, with a lot of economic headlines about the domestic and European economies. But the pick of the day has got to be the surprising resilience in the German economy which single-handedly pulled the aggregate Euro-zone economy out of reporting a negative GDP read.

Sheraz Mian
Director of Research