U.S. markets are closed on Monday in observance of Presidents’ Day. Hopefully, consumers will use this day off to do some shopping.
Here’s your Monday Scouting Report:
It’s About More Than Weather: There’s little doubt that the unusually harsh winter weather has had a negative (and hopefully temporary) effect on the economy.
However, one detail has economists worried it might be about more than just weather. In January, nonstore retail sales (i.e. online sales) fell 0.6% month-over-month in January. Perhaps this is something that’ll eventually get revised away.
Earnings Estimates Are Coming Down: “At the mid-point of the first quarter, analysts have lowered earnings estimates for companies in the S&P 500 for the quarter,” said FactSet’s John Butters. “The Q1 bottom-up EPS estimate (which is an aggregation of the estimates for all 500 companies in the index) has dropped 3.0% (to $US27.45 from $US28.28) since December 31… During the past year (4 quarters), the past five years (20 quarters), and the past 10 years, (40 quarters), the average decline in the EPS estimate during the first half of the quarter has been 2.6%. Thus, the decline in the EPS estimate recorded during the first half of the Q1 2014 quarter has been higher than the trailing 1-year, 5-year, and 10-year averages.”
Forecasting earnings is a funny business. On one hand you have investor relations reps who appear to be incentivized to manage expectations in a way so that they can beat them when the announce quarterly results. On the other hand, you have the Wall Street analysts who probably want to be as accurate as possible, but more often than not, they find themselves being too bearish. Through Friday, 399 of the S&P 500 companies announced Q4 earnings, and 71% have beaten estimates. That’s just a hair below the 4-year average of 73%.
- Empire Manufacturing Index (Tues): Economists estimate this New York area manufacturing index fell to 9.0 in February from 12.51 in January. “The Empire State headline index jumped over 10 points in January, and the new orders index escaped negative territory for the first time in two months,” noted Nomura’s Lewis Alexander who expects a 10.0 reading. “The increase in this new orders indicator is supportive of activity in February. However, we expect the continuous inclement weather to weigh on manufacturing sentiment in the Northeast region.”
- NAHB Housing Market Index (Tues): Economists estimate the homebuilding sentiment index was unchanged at 56 in February. “Housing demand has weakened modestly, in part due to cold weather, which can weigh on buyer traffic,” said Bank of America Merrill Lynch economists. “That said, the fundamentals for homebuilding are positive given extremely low inventory and plenty of opportunities for new construction.”
- Producer Price Index (Wed): Economists estimate producer prices climbed by just 0.1% in January. Year-over-year, they estimate prices climbed by 1.2% and excluding food and energy prices 1.4%. “Energy is likely to be neutral as a rise in natural gas prices offset a decline in gasoline prices,” said Citi’s Peter D’Antonio. PPI will be completely overhauled with the release of the report. “The index will now include services and construction prices and will incorporate prices of products that go to government and are exported, as well as traditional products that go to consumers and business.”
- Housing Starts (Wed): Economists estimate housing starts fell 4.9% to an annualized rate of 950,000 in January. “The homebuilders’ survey continues to show near the best views of current activity in eight years, having reversed only a modest pullback seen last year when mortgage rates moved higher, and our AlphaWise team’s data sources pointed to good underlying growth in housing permits in January,” said Morgan Stanley’s Ted Wieseman. “But bad weather was probably a temporary drag on starts, so we look for a 3% decline.”
- Fed FOMC Minutes (Wed): The Federal Reserve will publish the minutes from its Jan. 28-29 Federal Open Market Committee meeting at 2:00 p.m. ET. “The FOMC minutes may not provide much new information in light of Fed Chairman Yellen’s inaugural monetary policy testimony before the House Financial Services committee last week,” said Deutsche Bank’s Brett Ryan. “Keep in mind there were only nine FOMC members voting at the January meeting compared to the usual full slate of 12 voting members. Media reports have suggested the Senate Banking committee will consider the nominations of Stanley Fischer, Lael Brainard, and Jerome Powell (for a second term) in the final week of February. This leaves one board seat still vacant. We may get some interesting tidbits with regard to forward guidance in the minutes, which Ms. Yellen touched upon in her testimony. She stressed that both thresholds for inflation and the unemployment rate will need to be met before the Committee considers tightening policy. Moreover, Ms. Yellen said it would take a material change in the outlook to stop tapering.”
- Consumer Price Index (Thurs): Economists estimate consumer prices climbed by 0.1% in January. Year-over-year, they estimate prices climbed 1.6%. “Retail gasoline prices rose 1% in January, but that was less than normal seasonality and should be converted into a 2% decline after seasonal adjustment,” said Morgan Stanley’s Wieseman. “Continued softness in food prices should also restrain the headline CPI.”
- Initial Jobless Claims (Thurs): Economists estimate initial claims fell to 334,000 from 339,000 a week ago. “Initial jobless claims probably fell after a larger-than-expected rise in the prior week,” said Citi’s D’Antonio. “If correct, the four-week moving average edged lower, and was little changed from the reading reported during the previous month’s BLS payroll employment survey period.”
- Markit US PMI Preliminary (Thurs): Economists estimate flash PMI registered at 53.7 in February. Any reading above 50 signal growth.
- Philadelphia Fed Business Outlook (Thurs): Economists estimate the Philly Fed index slipped to 8.0 in February from 9.4 in January. “New orders have been on a downward trend for the last 3 months and we expect this streak to continue,” said Bank of America Merrill Lynch Economists. “In particular, below-average temperatures and snowfall should have negatively impacted demand for manufactured goods, instigating firms to cut production lines. That said, inventories were drawn down significantly in the prior month, with the index falling to -19.6 from 16.0 in December. As a result, firms may use the month as an opportunity to rebuild their stock.”
- Existing Home Sales (Fri): Economists estimate that sales fell to an annualized rate of 4.67 million in January. “Pending home sales collapsed 9% in December,” noted Credit Suisse economists. “The pending data measure contracts signed, and generally lead existing sales (which are based on closings), by 1-2 months. We therefore expect a drop in January existing sales… The National Association of Realtors (keepers of the pending data) pointed to frigid weather as materially impacting contract signings.” Friday’s report will come with annual benchmark revisions.
Record high corporate profit margins continue to be on every stock market watcher’s radar. While analysts and chief financial officers expect margins to remain high, the commentary from this earnings season’s conference call suggest we should think about margins with caution.
“Companies once again presented mixed outlooks for margins, but many indicated that expansion will be difficult,” said Goldman Sachs’s David Kostin citing the calls. “Consistent with our forecast that profit margins will remain roughly flat near historical peak levels for the next two years, managements highlighted difficult pricing and higher input costs as key factors offsetting operating leverage, efficiency gains, and continued cost controls.”