Weak Retail Sales & Mixed Start to Q3 Earnings Likely to Dominate

The weaker-than-expected Retail Sales report for September reconfirms what we saw from the non-farm payroll and ISM surveys. The takeaway from this recent data flow is that the U.S. economy lost its growth mojo during the summer months, which means that the Fed’s monetary policy normalization process is an early 2016 event at the earliest. This delay in Fed lift-off is the primary reason why stocks have moved up lately, though a prolonged downshift in the U.S. economic outlook makes it difficult to get excited about stocks, with or without Fed support.

See for example the all-around weakness in this morning’s Retail Sales reading, a proxy for U.S. consumer spending, with not only the September numbers coming short of estimates but the prior month’s modest gains getting revised away. The part of this report that feeds directly into the government’s GDP calculation, called the ‘control group,’ also came short of estimates, which means that Q3 GDP growth estimates will be coming down further in the coming days. The Atlanta Fed’s real-time Q3 GDP growth estimate is currently tracking to +1%, which will likely go down following this Retail Sales report. The Retail Sales ‘control group’ excludes construction materials in addition to autos and gasoline.

On the earnings front, we have mixed results from the big banks, with J.P. Morgan (JPM) failing to impress with its results after the close on Tuesday while Wells Fargo (WFC) and Bank of America (BAC) this morning largely able to beat expectations. We know it was a tough period for these banks with modest gains in their core loan portfolios offset by soft capital markets activities in a backdrop of persistently low interest rates that has been keeping their net interest margins under pressure.

As a result, bank revenues are down, with cost cuts accounting for all of the bottom-line growth. Including results from these big banks, we now have Q3 results from 24.9% of the Finance sector’s total market cap in the S&P 500. Easy comparisons for Bank of America are skewing the growth numbers at this stage, but the overall earnings growth for the sector is flat on down revenues on an ex-BAC basis.