Tuesday, February 24, 2015
The Fed remains in focus today as Chairwoman Janet Yellen starts her two-day Congressional testimony. She isn’t expected to make news today, though markets will be looking closely for clues to changes interest rate policy.
Unlike last week’s FOMC minutes from the January meeting when the expected mid-year timeline for rates liftoff appeared to get pushed back, the Chairwoman’s testimony today will try to keep the June schedule on the table. In that respect, her testimony could get interpreted as somewhat hawkish. But it would make perfect sense for Yellen’s testimony today to be more upfront compared to the tone and substance of the January FOMC meeting. We had a blockbuster jobs reading since then, the U.S. dollar has stabilized and even the situation out of Europe seems a lot less dire.
On the flip side, there are those who advise the Fed to stick to its ‘patient’ narrative and not get sucked into a premature tightening cycle that it will need to reverse down the road. They cite the example of the Swedish central bank who recently started easing to counter signs of deflation. The advocates of caution cite recent soft economic readings like the Durable Goods report, the factory sector ISM survey and home sales numbers to make their point.
On the earnings front, the focus lately has been on the Retail sector, as is typically the case at the last stages of every reporting cycle. And this morning brought in Q4 results from a number of retail leaders, such as Home Depot (HD) and Macy’s (M). Including these reports, we now have seen Q4 results from 25 of the 42 Retail sector companies in the S&P 500 index that combined account for 78% of the sector’s total market capitalization.
Total earnings for these retailers are up +3.9% on +5.8% higher revenues, with 68% beating EPS estimates and 52% coming ahead of revenue expectations. Relative to the sector’s performance over the past year or so, this is a marginally better performance, though the sector’s strong stock price response to the earnings reports appears to be anticipating even better times ahead. Market participants are justifiably hoping that the retailers will be in the front lines of beneficiaries of lower energy costs. This expectation has a reasonable enough basis, though the magnitude of improvement at this stage is fairly modest.
Sheraz Mian
Director of Research
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