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Monday, July 15, 2013

The stock market today has to contend with not-so-bad data out of China, but decidedly bad Retail Sales numbers on the home front. Investors will be looking for the market to build on last week’s record close as the Q2 earnings season gets into high gear and Bernanke provides further clarification on the 'Taper' issue in testimony before Congress later this week.

On the earnings front, Citigroup’s ((C - Free Report) ) better than expected report this morning following strong reports from J.P. Morgan ((JPM - Free Report) ) and Wells Fargo ((WFC - Free Report) ) on Friday sets us up the stage for a slew of banking sector earnings this week. Q2 earnings growth is resting solely on the banking sector and the group appers on track to come through on the promise.

China’s in-line second quarter GDP growth rate of 7.5% provides further confirmation of a decelerating trend in the world’s second largest economy, but it should ease some of the worst fears that suspected an even weaker showing. The country's new leadership team hasn’t shown any nervousness about the slowdown as they move the economy away from investment-led growth and more geared towards domestic consumption.

To that end, today’s data offers some promising signs as retail sales accelerated in June from the prior month’s growth pace. But any shift in the economy’s orientation will likely be a long-drawn and multi-year process as the the apparent retail sales momentum of 13.3% in June vs. 12.9% in May is mostly due to inflation. Importantly, consumption as a share of GDP fell in the first half of 2013 from 2012’s level

China’s retail sales data may or may not be showing momentum, but there are no questions about the weak tone of the June U.S. Retail Sales data from this morning. The Retail Sales disappointment runs counter to the positive momentum in the labor market and broader measures of consumer confidence. This will likely prompt further downward revisions to Q2 GDP estimates, which was steadily coming down in recent weeks to begin with.

But the Q2 GDP weakness is not unexpected as consensus estimates all along expected the growth pace to bottom in the second quarter and accelerate back from Q3 onwards. The ‘Taper’ narrative reflects this growth outlook as well and we will find a bit more on how the Fed views the economy from Bernanke’s Congressional testimony later this week.

Sheraz Mian
Director of Research

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