Markets Is Looking To Open In Red On Europe’s Weak Data – Economic Highlights

The flow of soft data out of Europe continued today, with the Bank of England lowering the country’s growth outlook and factory output in the Euro-Zone coming in weaker than expected. The British central bank indicated today that it was unlikely to start raising interest rates before the second half of the year, citing lower growth and inflation projections for next year. The bank now expects the British economy to expand at +2.9% pace in 2015, down from their earlier estimate of +3.1%, with downgrade primarily reflecting drag from the Euro-zone region.

The Bank of England was expected to become the first major central bank to start raising interest rates early next year, but that expected timeline has now shifted to October 2015. These soft British data points notwithstanding, the country’s economy still has the most robust outlook of any of the major European economies. This morning’s weaker than expected September factory output data for the Euro-zone shows that the region’s economy likely didn’t improve much in Q3 from the anemic pace of the preceding quarter. This growth challenge has exacerbated the deflation risk facing the region, with the markets looking to the European Central Bank to lead an aggressive monetary easing program along the lines of what the U.S. Fed recently concluded. But we haven’t seen much tangible action from the ECB yet.

On the earnings front, the Q3 reporting cycle is almost over, with results from 454 S&P 500 members already out. The earnings season has ended for 7 of the 16 Zacks sectors and most of the other sectors have only a handful of companies each still to report results. The Retail sector is the only one with any sizable number of Q3 reports still awaited, with Macy’s (M) reporting this morning and Wal-Mart (WMT) coming out with results tomorrow morning. Macy’s beat on EPS, but missed on the top-line and lowered its guidance for the current quarter. The company has been one of the best operators in the retail space, but even they don’t seem to be immune from the overly promotional environment in the industry.

We will see how Wal-Mart fares tomorrow, but the retailing giant’s estimates have been coming down lately following their negative pre-announcement. One would have expected Wal-Mart to be a key beneficiary of the recent downtrend in gasoline prices, but that doesn’t seem to be the case, at least judging from their recent commentary.

Including this morning’s Macy’s report, we now have Q3 results from 24 of the 43 retail sector companies in the S&P 500 index. Total earnings for these retailers are up +2.9% on +8% higher revenues, with 70.8% beating EPS estimates and 62.5% coming ahead of revenue expectations. Relative to the sector’s earnings performance over the past year or so, the ratio of companies beating earnings and revenue estimates is tracking higher while the earnings growth rate is tracking lower. Margin pressures seem to be the hold up on the earnings front and that’s a function of the uber-competitive landscape in the industry.

Retail sector stock prices have been reflecting this sub-par earnings backdrop as well, with the sector one of the weakest in the S&P 500 index year to date. The roughly half of the sector’s Q3 results that we have seen already don’t raise much confidence in what to expect from the still-to-come reports.