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Ahead of Wall Street - March 29, 2012

Sheraz Mian

Thursday, March 29, 2012

There is nothing in this morning’s data to bring the market out of its somber mood of recent days. In fact, both of this morning’s economic readings – the final GDP read on the fourth quarter of 2011 and the weekly initial Jobless Claims – came in weaker than expected. The soft earnings report from Best Buy (BBY) and murmurs of concerns about Spain will not help sentiment either.

The Commerce department’s final read on the fourth quarter 2011 GDP turned to be non event, as the growth rate was left unchanged at 3%. The internals of the report remained largely unchanged as well, with personal consumption expenditures (or consumer spending) remaining at 2.1%. With the first quarter of 2012 coming to an end, this morning’s final read on the last quarter of 2011 may seem like inconsequential record keeping. But there were good reasons to expect an upward revision in the growth rate given strong retail sales data in December. The hope was that an upward revision to the GDP growth rate will have a bearing on current quarter growth expectations.

It will be interesting to see the February consumer spending numbers coming out in Friday’s Personal Income & Outlays reading. Given the recent improvement in the labor market, one could reasonably expect favorable momentum on the household spending front. We will get more confirmation of the labor market momentum in next week’s March non-farm payrolls numbers coming out next week, but today’s Jobless Claims report will keep the hopes alive.

This morning’s initial Jobless Claims reading came in a tad weaker than expected, but the overall level remained in favorable vicinity. There was a drop of 5K in initial claims last week to 359K, though the drop was from a upwardly revised 364K level. This means that last week’s initial claims were actually 16K higher than the originally reported 348K level. The four-week average, which smoothes out the week-to-week fluctuation, dropped by 3.5K to 365K. The rise above the psychologically significant 350K level notwithstanding, the overall trend in initial claims remains favorable and at its lowest level in four years. Historically, initial Jobless Claims at these levels have been associated with strong gains in the monthly government non-farm payroll report. We have been confirmatory evidence of that over the last three months and will be getting the March reading next Friday.

In corporate news, Best Buy came ahead of earnings expectations, but missed on the top line and comp sales. The company indicated what appears to be a significant shift in its strategic direction. The electronics retailer has been struggling to come out with a winning strategy in the current web-centric consumer environment. They are announcing store closings and greater emphasis on the small format stand-alone locations. Best Buy has been struggling to effectively compete against Amazon (AMZN) and Wal-Mart (WMT) in the increasingly competitive space and it is unclear if these steps will be more effective.

Sheraz Mian
Director of Research

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