Soft in Europe, Stronger at Home - Ahead of Wall Street

Thursday, May 15, 2014
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Soft data out of Europe and strong economic readings on the home front provide the backdrop for today's action. Plenty of U.S. economic data is still on tap for release a little later, but the weak Wal-Mart WMT earnings report adds to this morning's cloudy start.

On the data front, this morning's U.S. consumer inflation reading showed some momentum, pushing it in the Fed's desired direction, though still in fairly benign territory. The Empire State regional manufacturing survey and the weekly Jobless Claims numbers showed strong gains, with initial claims falling below the 300K level. All of this is in-line with the view that the U.S. economy is coming out of the winter slump and on track for a much-improved showing in the current quarter.  

Unlike this favorable U.S. picture, the situation across the pond is anything but positive. The Eurozone economy expanded at a lower than expected pace in Q1, despite the strong momentum in Germany, which expanded at its fastest pace in three years.

There wasn't much growth this side of the Atlantic in the first quarter of the year, but at least we can blame weather for the slowdown. The Eurozone doesn't have anything to blame for the region's lack of economic vitality almost a year after the end of the last recession, though many would blame the European Central Bank's (ECB) inaction despite the ongoing disinflationary trends.

The ECB has been a lot of talk but not much action for quite some time. At the central bank's meeting last week, ECB President Mario Draghi guided towards some easing action at the next month's meeting, and the common currency has been losing ground lately in anticipation of such a move. But given the strong momentum in the German data, Draghi may not have the unequivocal backing of the German authorities to start easing in a meaningful way.

On the earnings front, we got a solid report from Cisco CSCO after the close on Wednesday, with networking giant coming out with better than expected results for Q1 and also providing a modestly improved outlook for the current and coming quarters. Cisco may no longer be a bellwether for the technology sector's capital spending trends, but it's improved results nevertheless are a net positive for the space. Unlike Cisco, there is no question about the Wal-Mart's bellwether status, particularly for the low end consumer.

The retailing giant missed estimates and guided lower, citing a multitude of reasons for the shortfall. Weather has been a recurring theme for everything Q1-related, and was likely a factor in Wal-Mart's miss as well. But the company's core low-end consumer continues to struggle with tepid job gains and stagnant wages weighing on buying power.

The high-end consumer has fared a lot better in this recovery, though you would be hard pressed to find evidence of that in Macy's M report on Wednesday. We can chalk it all up the tough spot in which the retail sector as a whole has been lately. What these reports are showing is that we may not see much improvement in the sector's earnings picture in the current period either, even when weather is no longer a problem.

Sheraz Mian
Director of Research