Positive Earnings and Retail Sales

Today’s favorable retail sales report and positive results from the banking bellwether will help the market reverse Tuesday’s pullback.

The March retail sales report is particularly reassuring in the current backdrop of concerns about the impact of high fuel and food prices on consumer spending. The headline growth number was modestly softer than expected, but the key number that excludes the volatile auto and gasoline sales came out ahead. Also, the prior month’s numbers were revised upward.

The positive March retail sales report notwithstanding, it is becoming obvious now that the first-quarter GDP growth rate will be significantly lower than was initially expected. Please recall at the start of the year, expectations were for the growth rate to come in the 3.5% to 4% range. But all the recent data point to the economy eking out at best growth rate in the 2% vicinity. If the market perceives this 2% rate as the new trend line for the economy, then we may see a pullback in stocks in the coming days, despite a very solid earnings season.

As reassuring as the retail sales report was, we got a strong earnings report from J.P.Morgan Chase (JPM). The banking giant came out with quarterly results that handily beat on EPS, but came short on revenue. A key positive was the strength in investment banking and emerging evidence of momentum in the core lending business.

As has been the trend lately with bank earnings, lower provisioning for loan losses was a major boost for JPM’s earnings. A key beneficiary of lower provisioning was the bank’s credit card business, resulting in a plunge in the card charge-off rate rate from the year-earlier rate.

The soft top-line result was not entirely unexpected and will likely be discounted by the market. Banks have been struggling in their core business of writing loans, demand for which remains anemic given the uneven recovery. Relatively flat net interest rate margins, soft trading revenues, and mixed investment banking advisory services have also been weighing on revenue growth.

J.P.Morgan has made a good start to bank earnings. We will get to see results from Bank of America (BAC) on Friday morning and a host of other next week. Let’s see if the momentum can be sustained.

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