Wednesday, May 15, 2013
Stocks have plenty of domestic economic data to chew on in today’s trading session, with this morning’s wholesale inflation reading essentially in-line with expectations and the Empire State manufacturing survey coming out a bit on the soft side. We will get the Industrial Production and homebuilder sentiment surveys a bit later, but the market’s focus will likely remain on the weak GDP data out of Europe.
First quarter GDP data for the Euro-zone shows the region is in recession for the sixth straight quarter, with even Germany barely in the positive column. The region’s combined GDP fell a bigger than expected -0.9% in annualized terms in the first quarter after the -2.3% drop in the 2012 Q4.
The rot that started in Greece three years back is now firmly entrenched in the region’s core, with conditions in France, Italy and Spain showing no signs of improvement. Recent data for Germany, which alone accounts for almost a third of the Euro-zone GDP, doesn’t inspire much confidence about the current period either.
The sickly state of the region’s economy contrasts with the +2.5% GDP growth in the U.S. in Q1. Even the Japanese economy is expected to show a positive growth number. Europe hasn’t been a growth engine for the global economy in recent memory, but it has never been a drag either. However, a host of companies -- ranging from consumer-centric names like McDonald’s (MCD) to large-scale manufacturers like Ford (F) -- been citing the region as the weakest link in their markets.
Financial conditions in the region have definitely improved, with the ECB’s easy monetary policy helping sovereign debt yields steadily come down, particularly in Spain and Italy. But these have yet to show up in improved business conditions.
On earnings front, we got a solid earnings report from Macy’s (M) this morning, while Cisco (CSCO) will report after the close. Cisco typically doesn’t have much trouble coming out positive earnings surprises, but management’s comments about business conditions will determine how investors react to the report. John Chambers, the company’s CEO, had cautioned against growing reliance on government contracts in a constrained fiscal backdrop at the time of the last quarterly release.
It will be interesting to see if they see any effects from the budget sequester in today’s release; the sequester issue did come up a few times in rival Juniper Networks’ (JNPR) quarterly release and their quarter ended in March (CSCO’s ended in April). The soft GDP data out of Europe this morning further underscores this unfavorable operating environment.
Director of Research
Wednesday, May 15, 2013