A reassuring start to the Q2 earnings season and a mixed Retail Sales report provide the backdrop for today’s trading action. Stocks today will likely maintain the positive momentum of the last few sessions, though headlines from the Fed Chairwoman’s Senate testimony today could come in the way. That said, there is no reason to think that Janet Yellen will move off-script and spook the markets.
On economic data, the July Empire State regional manufacturing survey came in better than expected. The June Retail Sales read missed estimates on the ‘headline,’ but the report’s core ( the so-called ‘control group’ that goes into the GDP report’s consumer spending numbers) was positive. Also, the numbers for the prior month were revised higher, indicating that consumer spending trends are steadily improving in Q2.
The monthly Retail Sales report isn’t a perfect proxy for the GDP report’s consumer spending component as it only tracks nominal (or non inflation adjusted) merchandise sales at the retail and food service establishments, but it nevertheless gives us good sense of what is happening in this key part of the economy. This report confirms that the U.S. economy is on track to bounce back in the second quarter and the hope is that the growth pace will accelerate in the current and coming quarters.
On the earnings front, J.P. Morgan (JPM) and Goldman Sachs (GS) maintained the positive run of Finance sector results that we saw with the Citigroup (C) and Wells Fargo (WFC) reports. There is not much growth as earnings essentially remain flat from the year-earlier level, but results have been coming in marginally better relative to subdued expectations. The outperformance is coming from a combination of absence of major negatives and modest improvements in core businesses.
On the commercial banking side, we are seeing loan growth starting to pick up on the back of improving commercial and industrial loans and momentum in auto loans even as mortgage portfolios continue to decline and the net interest margin backdrop remains difficult. The improvement on the investment banking side is more notable – we saw that with both Citi and J.P. Morgan — but has a material impact with Goldman given its dominant advisory franchise. The trading side of the business is still struggling — likely a reflecting a secular decline given the changed regulatory environment — but the weakness has been less than what consensus was reflecting.
Beyond these major financial names, we got a solid earnings report this morning from Johnson & Johnson (JNJ), with the company beating top- and bottom-line estimates and raising its outlook for the rest of the year. It will be interesting to see if the momentum will continue with Intel (INTC), Yahoo (YHOO) and CSX Corp (CSX) reporting after the close today, but overall it’s a good start to the Q2 reporting cycle.
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