Friday, February 8, 2013

Positive trade data out of China and the U.S. should perk up the market’s spirits a bit, but will likely prove not enough to fully reverse Thursday’s losses. The market is in a somewhat of a news valley at present, with not much on the earnings and economic docket to give it a clear directional nudge. The trend will likely continue next week as well, though the January Retail Sales data coming next week (Wednesday) will give us a good sense of the impact of payroll tax hikes on consumer spending.

The U.S. trade deficit narrowed more than expected in December, reversing the surge from the month before, and essentially confirming that the fourth quarter GDP growth number will be revised upwards.

The first read on fourth quarter GDP that came out last week and showed -0.1% decline reflected the Commerce Department’s estimate of December trade deficit. This morning’s trade deficit number is significantly lower than what was imbedded in Commerce’s advance GDP number. Everything else constant, this narrower than expected deficit number by itself would amount to raising the Q4 GDP growth rate from +0.5% to +0.7%. Bottom line, the Q4 GDP number is actually is actually in the positive territory. This may not be a surprise for the market anyway as investors had largely discounted the negative GDP print on the day that it came out.

The other trade data today came from China, further confirming the positive momentum that we have been seeing lately in that country’s economic numbers. The consensus view on China is that the country’s economy has turned around, with the long-feared ‘hard landing’ no longer an expected outcome. The comment from Eaton Corp ( ETN - Analyst Report ) CEO earlier this week that China’s actual economic growth in 2012 was half of the official GDP numbers would indicate that the ‘hard-landing’ may have come and gone already.

On the earnings front, we got better than expected results from Moody’s ( MCO - Analyst Report ) this morning and LinkedIn ( LNKD - Analyst Report ) and Activision Blizzard ( ATVI - Snapshot Report ) after the close on Thursday. The overall scorecard for the Q4 earnings season as of this morning shows that we have seen results from 342 S&P 500 companies (77.1% of the index’s total market cap).

Total earnings for these 342 companies are up +2.8%, with 67% of the companies beating earnings expectations. On the revenue side, 63.5% of the companies have come ahead of expectations and total revenues are up +0.9%. This is a better performance relative to both pre-season expectations and what these same companies reported in the third quarter. We have started seeing estimates for the coming quarters come down in recent weeks. But they still represent a material ramp up from what we have been seeing lately.

Sheraz Mian
Director of Research